Amendment to Prohibited Transaction Class Exemption 84-14 for Transactions Determined by Independent Qualified Professional Asset Managers (the QPAM Exemption)

Federal RegisterApr 3, 2024

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2550

[Application No. D-12022]

Z-RIN 1210 ZA07

Amendment to Prohibited Transaction Class Exemption 84-14 for Transactions Determined by Independent Qualified Professional Asset Managers (the QPAM Exemption)

AGENCY:

Employee Benefits Security Administration, U.S. Department of Labor.

ACTION:

Final amendment to class exemption.

SUMMARY:

This document gives notice of a granted amendment to prohibited transaction class exemption 84-14 (the QPAM Exemption). The QPAM Exemption provides relief from certain prohibited transaction restrictions of Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA) and Title II of ERISA, as codified in the Internal Revenue Code of 1986, as amended (the Code).

DATES:

The amendment is effective June 17, 2024.

FOR FURTHER INFORMATION CONTACT:

Brian Mica, telephone (202) 693-8540, Office of Exemption Determinations, Employee Benefits Security Administration, U.S. Department of Labor (this is not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

Title I of ERISA broadly prohibits transactions between plans and any “party in interest”—who, in general, are people or entities closely connected to ERISA-covered employee benefit plans as defined in ERISA section 3(3). Title II of ERISA, codified in the Code, includes parallel prohibitions applicable to “disqualified persons”

who, in general, are persons or entities closely connected to plans

as defined in Code section 4975(e)(1).

The term “disqualified person” is defined in Code Section 4975(e)(2) and is similar to definition of the term “party in interest” codified in ERISA section 3(14). All references to “party in interest” in this Preamble and the QPAM exemption include “disqualified person.”

For purposes of the exemption that term “Plans” includes plans and Individual Retirement Accounts (IRAs) described in Code section 4975(e)(1) and ERISA-covered employee benefit plans described in ERISA section 3(3) (referred to as “Plans,” and “IRAs” herein). Although the Department is using the same definition of “plan” in the final amendment that previously existed in the QPAM Exemption, the Department is finalizing a ministerial change which will capitalize this term when referring to plans impacted by the amendment.

Absent an exemption, ERISA section 406(a)(1)(A) through (D) and Code section 4975(c)(1)(A) through (D) prohibit, among other things, sales, leases, loans, and the provision of services between these parties. Congress enacted these prohibitions to protect plans, their participants and beneficiaries, and IRA owners

from the potential for abuse that arises when plans and IRAs engage in transactions with closely connected parties.

For purposes of this Final Amendment, the term “IRA owner” refers to the individual for whom an IRA (as defined in the Final Amendment) is established.

The Department grants this exemption, which was proposed on its own motion, pursuant to its authority under ERISA section 408(a) and Code section 4975(c)(2).

As required by ERISA section 408(a) and Code section 4975(c)(2), the Department finds that the exemption is administratively feasible, in the interests of Plans and their participants and beneficiaries and protective of the rights of participants and beneficiaries of Plans and IRA owners.

The exemption also is granted in accordance with procedures set forth in 29 CFR part 2570, subpart B (76 FR 66637 (October 27, 2011)). Please note that effective December 31, 1978, section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. (2018), transferred the authority of the Secretary of the Treasury to issue exemptions to the Secretary of Labor. Therefore, this notice of amendment to the QPAM Exemption is issued solely by the Department.

The QPAM Exemption permits an investment fund

holding assets of Plans and IRAs that is managed by a “qualified professional asset manager” (QPAM) to engage in transactions with a “party in interest” or “disqualified person” to Plans or an IRAs, subject to protective conditions.

This amendment modifies Section I(g) of the exemption, a provision under which a QPAM may become ineligible to rely on the QPAM Exemption for a period of 10 years if the QPAM, various affiliates, or certain owners of the QPAM are convicted of certain crimes. As discussed in detail below, this amendment: (1) requires a QPAM to provide a one-time notice to the Department that the QPAM is relying upon the exemption; (2) updates the list of crimes enumerated in the prior version of Section I(g) to explicitly include foreign crimes that are substantially equivalent to the listed crimes; (3) expands the circumstances that may lead to ineligibility; and (4) provides a one-year winding down (transition) period to help Plans and IRAs avoid or minimize possible negative impacts of terminating or switching QPAMs or adjusting asset management arrangements when a QPAM becomes ineligible pursuant to Section I(g), and gives QPAMs a reasonable period to seek an individual exemption, if appropriate.

For purposes of the QPAM Exemption, an investment fund includes single customer and pooled separate accounts maintained by an insurance company, individual trusts, and common, collective, or group trusts maintained by a bank, and any other account or fund subject to the discretionary authority of the QPAM.

See

Section VI(b) of the QPAM Exemption.

Class Exemption for Plan Asset Transactions Determined by Independent Qualified Professional Asset Managers, 49 FR 9494 (Mar. 13, 1984) as corrected at 50 FR 41430 (Oct. 10, 1985), as amended at 66 FR 54541 (Oct. 29, 2001), 70 FR 49305 (Aug. 23, 2005), and 75 FR 38837 (July 6, 2010).

As further discussed below, the Department has substituted the term “transition period” for the term “winding-down period” that it used in the proposed amendment. The terms have the same meaning.

This amendment also: (1) provides clarifying updates to Section I(c) regarding a QPAM's authority over investment decisions; (2) adjusts the asset management and equity thresholds in the QPAM definition in Section VI(a); and (3) adds a new recordkeeping provision in Section VI(u). The amendment will affect participants and beneficiaries of Plans, IRA owners, the sponsoring employers of such Plans or IRAs (if applicable) and other plan sponsors, QPAMs, and counterparties engaging in transactions covered under the QPAM Exemption.

Background of the QPAM Exemption

In 1984, the Department published the QPAM Exemption, which permits an investment fund managed by a QPAM to engage in a broad range of transactions with parties in interest with respect to a Plan, subject to protective conditions. The Department developed and granted the QPAM Exemption based on the premise that it could provide broad exemptive relief from the prohibitions of ERISA section 406(a)(1)(A) through (D) and Code section 4975(c)(1)(A) through (D) for transactions in which a Plan engages with a Party in Interest only if the commitments and investments of Plan assets and the negotiations leading thereto are the sole responsibility of an independent investment manager.

Section I of the QPAM Exemption (the General Exemption)

provides broad

prohibited transaction relief for a QPAM-managed Investment Fund to engage in transactions with a Party in Interest, but it does not include relief for the QPAM to engage in any transactions involving its own self-dealing or conflicts of interest or kickbacks, which are prohibited under ERISA section 406(b)(1) through (3) and 4975(c)(1)(E) and (F). This important limitation on the relief in the QPAM Exemption serves as a key protection for Plans that are affected by the exemption. The QPAM Exemption also includes conditions designed to ensure that the QPAM does not engage in transactions with a Party in Interest that has the power to influence the QPAM's decision-making processes. Additionally, QPAMs remain subject to the fiduciary duties of prudence and undivided loyalty set forth in ERISA section 404 with respect to their client Plans.

The Department proposed a ministerial change to replace “Part” with “Section” in the QPAM Exemption. For consistency, the Department is using only the term “Section” throughout this preamble. The Department also proposed a ministerial change to capitalize defined terms in the QPAM Exemption and is using those capitalized

terms throughout this preamble as they are being finalized in this amendment.

The General Exemption covers many different types of transactions. For example, the exemption provides relief for a QPAM to use fund assets to purchase an asset from certain Parties in Interest

to a Plan that is invested in the fund. The General Exemption also facilitates much more complex transactions, such as when a QPAM designs a fund to replicate the return of certain commodities indices by investing in futures, structured notes, total return swaps, and other derivatives where a Party in Interest to a Plan that invested in the fund is involved in the transaction.

In addition to the General Exemption, the QPAM Exemption also contains “Specific Exemptions” in Sections II, III, and IV, which the Department is not modifying in this amendment.

The plural form has the same meaning as the singular defined term “Party in Interest.”

See e.g.,

Notice of Proposed Exemption involving Credit Suisse AG, 79 FR 52365, 52367 (Sept. 3, 2014).

When it proposed the QPAM Exemption in 1982, the Department expressly indicated that any entity acting as a QPAM, and those who are in a position to influence the QPAM's policies, are expected to maintain a high standard of integrity.

Accordingly, the exemption includes Section I(g), which provides that a QPAM is ineligible to rely on the exemption for a period of 10 years if the QPAM, various affiliates, or owners of a five (5) percent or more interest in the QPAM are convicted of certain crimes. Ineligibility begins as of the date of the judgment of the trial court, regardless of whether the judgment remains under appeal.

Proposed Class Exemption for Plan Asset Transactions Determined by Independent Qualified Professional Asset Managers, 47 FR 56945, 56947 (Dec. 21, 1982).

The Qualified Professional Asset Manager

A QPAM is defined as a bank, savings and loan association, insurance company, or registered investment adviser that meets specified asset and equity thresholds set forth in the exemption and acknowledges in a Written Management Agreement that it is a fiduciary with respect to each of its client Plans. The Department noted in the 1982 proposed exemption that these categories of asset managers are subject to regulation by federal or state agencies and expressed the view that large financial services institutions would be able to withstand improper influence from Parties in Interest (

i.e.,

maintain independence).

As a general matter, the Department's position continues to be that transactions entered into on behalf of Plans with a Party in Interest are most likely to conform to ERISA's general fiduciary standards when the decision to enter into the transaction is made by an independent fiduciary.

Id.

at 56947.

The QPAM's independence and discretionary control over asset management decisions protect Plans from the danger that a Party in Interest will exercise improper influence over decision-making regarding Plan assets. The QPAM acts as a fundamental protection against the possibility that Parties in Interest could otherwise favor their own competing financial interests at the expense of Plans, their participants and beneficiaries, and IRA owners. Because the Department relies upon the QPAM as a key protection against such improper conduct and the threat posed by conflicts of interest, it is critically important that the QPAM, and those who are in a position to influence its policies, maintain a high standard of integrity. QPAMs must have the authority to make decisions on a discretionary basis without direct oversight for each transaction by other Plan fiduciaries. Given the scope of their discretion, it is imperative that the QPAM, its Affiliates, and certain owners avoid engaging in criminal conduct and other serious misconduct that would jeopardize Plan assets or call into question the Department's reliance on the QPAM's oversight as a key safeguard for Plan participants and beneficiaries and IRA owners.

Purpose and Approach for the Final Amendment

Substantial changes have occurred in the financial services industry since the Department granted the QPAM Exemption in 1984. These changes include industry consolidation and an increasingly global reach for financial services institutions, both in their affiliations and their investment strategies, including those for Plan assets. In the years since 1984, the Department has repeatedly considered applications for individual exemptions in connection with convictions for crimes causing ineligibility under Section I(g). Through processing these applications, the Department has gained extensive experience analyzing QPAMs' failures to comply with Section I(g) of the QPAM Exemption as a result of corporate convictions in domestic and foreign jurisdictions. This experience has affirmed the Department's position that an ineligibility condition tied to criminal convictions provides necessary protection to Plans, their participants and beneficiaries, and IRA owners.

In practice, Section I(g) has effectively required QPAMs that become ineligible to seek an individual exemption to continue their reliance on the QPAM Exemption. Since 2013, the Department has received an increasing number of individual exemption requests involving Section I(g) ineligibility due to criminal convictions occurring within the corporate family of large financial institutions. To ensure that these exemptions are protective of Plans and participants and beneficiaries and in their interests as required by ERISA section 408(a) and Code section 4975(c)(2), the Department has required applicants to fully and accurately disclose: (1) the criminal conduct that led to their ineligibility, including whether the QPAM was involved; (2) the specific reasons they should be permitted to continue acting as a QPAM notwithstanding the criminal conduct; (3) the efforts they have undertaken to promote a culture of compliance in their corporate family; and (4) the steps they will take in the future to ensure Plans, their participants and beneficiaries, and IRA owners are protected. In these individual QPAM exemptions, the Department included additional protections, such as a comprehensive independent compliance audit and allowing client Plans to withdraw from their asset management arrangements with the ineligible QPAM without penalty. These exemptions have also required the QPAM to indemnify or hold their client Plans harmless in the event that the QPAM, or an Affiliate, or

owner of a five (5) percent or more interest engages in future misconduct.

Exemption applicants have consistently represented to the Department that Plan investors would be harmed if a QPAM abruptly loses exemptive relief as of the conviction date, as dictated by Section I(g). Although Section I(g) ineligibility does not bar a QPAM from acting as a discretionary asset manager for Plan assets after a conviction, applicants have informed the Department that the loss of exemptive relief under the QPAM Exemption has the potential to disrupt Plan investments and investment strategies, especially for transactions involving Plan counterparties that also are relying upon the relief provided in the QPAM Exemption.

According to these applicants, Plans may also experience transition costs if a Plan fiduciary needs to find an alternative asset manager on short notice after a QPAM becomes ineligible.

See e.g.,

Notice of Proposed Exemption involving JP Morgan Chase & Co., 81 FR 83372, 83363 (Nov. 21, 2016).

To protect Plans against the immediate disruption and costs caused by their QPAMs losing eligibility immediately upon conviction, the Department has granted several one-year temporary individual exemptions to QPAMs facing ineligibility. These individual exemptions provided the Department with sufficient time to engage in a more intensive review of information submitted by the applicants to determine whether a longer-term individual exemption was warranted to provide extended relief at the end of the one-year period.

Moreover, since 2013, both the one-year and longer-term exemptions have provided Plans with the important opportunity to exit from their asset management arrangements with a QPAM without the imposition of certain fees, penalties, or charges.

In such cases, the Department requires prominent notice be provided to client Plans along with additional protective conditions to ensure Plan assets are protected while longer-term prohibited transaction relief is considered.

Regulatory Administrative Record for the Proposed Amendment

The developments discussed above prompted the Department to propose the amendment to the QPAM Exemption on July 27, 2022, with an initial 60-day comment period that was set to expire on September 26, 2022 (the Proposed Amendment).

After the Department published the Proposed Amendment, it received two letters requesting an extension of the comment period.

The Department responded to the requests by extending the initial comment period for an additional 15 days until October 11, 2022, in a

Federal Register

Notice published on September 7, 2022,

and received 31 comment letters during this initial extended comment period.

87 FR 45204.

See

Public Comment #1 from American Bankers Association et al. and Public Comment #2 from American Retirement Association. The extension requests can be accessed here:

https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/public-comments/1210-ZA07/.

87 FR 54715.

Pursuant to section 605(b) of the Regulatory Flexibility Act (RFA), the Acting Assistant Secretary of the Employee Benefits Security Administration (EBSA) certified that the Proposed Amendment would not have a significant economic impact on a substantial number of small entities. After consulting with the Small Business Administration's Office of Advocacy (SBA), however, the Department decided to publish a Supplementary Initial Regulatory Flexibility Analysis (IRFA) that explained the Proposed Amendment's potential impact on small entities.

The Department requested comments on the IRFA by October 11, 2022, the same deadline as the extended comment period for the Proposed Amendment.

87 FR 56912 (Sep. 16, 2022).

In the September 7, 2022,

Federal Register

notice, the Department announced that it would hold a virtual public hearing on its own motion on November 17, 2022 (and if necessary, on November 18, 2022), to provide an opportunity for all interested parties to testify on material information and issues regarding the Proposed Amendment.

The Department received 13 requests to testify at the hearing. The notice also indicated the Department would: (1) reopen the public comment period from the hearing date until approximately 14 days after the Department publishes the hearing transcript on EBSA's website; and (2) publish a

Federal Register

notice announcing that the Department posted the hearing transcript to EBSA's website and providing the closing date for the reopened comment period.

87 FR 54715.

The Department held the virtual public hearing on November 17, 2022, and reopened the comment period on the hearing date.

The reopened comment period closed on January 6, 2023, and the Department received 150 additional comments.

The hearing did not continue on November 18, 2022, because the Department was able to schedule all witnesses that requested to testify on one day.

See https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-ZA07.

On March 23, 2023, the Department reopened the Proposed Amendment's comment period again because it understood that at least one interested party may have had additional information to provide the Department that was not submitted by the January 6, 2023 comment period deadline.

The reopened comment period provided an opportunity for all interested parties to submit additional information until April 6, 2023, and the Department received seven comments during this reopened comment period.

88 FR 17466.

See https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-ZA07.

The rulemaking process has provided the Department with a robust administrative record. After careful consideration of the approximately 200 comments received during the public comment periods and testimony presented at the public hearing, the Department is finalizing the Proposed Amendment (the Final Amendment), with the revisions discussed below.

Section I(g)—Reporting to the Department, Written Management Agreement, and Ineligibility

Reporting to the Department—Note: This Requirement has been moved from Subsection I(g)(1) of the Proposed Amendment to Section I(k) of this Final Amendment.

The Proposed Amendment would have required each QPAM that relies upon the exemption to report its legal name (and any name the QPAM may be operating under) by email to the Department at

QPAM@dol.gov.

The Department proposed that the QPAM would need to provide this notification to the Department only once unless the legal or operating name(s) of the QPAM relying upon the exemption was changed. The Department also indicated its intent to maintain a current list of entities relying upon the QPAM Exemption on its publicly available website.

For instance, assume a corporate family is comprised of legal entities named: Corporate Parent A, Investment Manager B, Broker-Dealer C, Retail Bank D, and Institutional Bank E (doing business as InstiBank). Investment Manager B and Institutional Bank E are the only entities acting as QPAMs. Investment Manager B would notify the Department that it is acting as a QPAM and its legal name is Investment Manager B. Institutional Bank E would notify the Department that it is acting as a QPAM and its legal name is Institutional Bank E, but it is doing business as InstiBank.

The Department received a variety of comments on this proposed reporting requirement. Some commenters opposed the requirement in part because no other prohibited transaction exemption requires “registration” or a listing on a publicly available website. Commenters also indicated that the publication of a list of QPAMs on the Department's website has the potential to mislead Plan participants and beneficiaries and IRA owners into thinking that a manager's inclusion or exclusion signifies whether the Department has endorsed its eligibility to rely on the exemption.

After considering these comments, the Department is finalizing the notice provision with the modifications discussed below. The notice requirement provides the Department with knowledge of the investment managers that are relying on the exemption and will serve as an important reminder to investment managers relying on the QPAM Exemption that the “QPAM” title and status are tied to an administrative prohibited transaction exemption that requires compliance with the exemption's conditions.

With respect to publishing the list on its website, the Department has significant experience publicly posting information in a manner that is not misleading. Additionally, the Department notes that a wide variety of information regarding investment advisers, including disciplinary violations, currently is publicly available through BrokerCheck.

The importance of having this information publicly available to provide Plan fiduciaries and participants and beneficiaries, and IRA owners with the ability to know whether their investment managers (or potential managers) are relying on the QPAM Exemption outweighs any harm that could occur if the information were misleading.

BrokerCheck is an online tool provided by FINRA that provides information regarding brokers and investment advisers such as employment history, certifications, licenses, and any violations.

https://brokercheck.finra.org/.

Commenters also noted that it is important for the Department to ensure that it has appropriate resources to maintain the list of QPAMs and keep it current. The Department appreciates this concern. Although there will likely be an initial wave of QPAMs reporting to the Department, the Department anticipates that minimal resources will be necessary to keep an updated list over the long-term.

Commenters also expressed concern that a QPAM could easily overlook the requirement to update the Department when it changes its legal or trade name, which could lead it to commit a series of inadvertent prohibited transactions that would only end when the QPAM reports its updated name to the Department. Related to this concern, commenters also requested the Department clarify that an inadvertent failure to report would not be considered Prohibited Misconduct

or otherwise jeopardize a manager's ability to rely on the QPAM Exemption.

Prohibited Misconduct was defined in proposed Section VI(s). See below for additional discussion of comments regarding the Proposed and Final Amendment definition.

The Department did not intend for the reporting requirement to create compliance issues for QPAMs that could jeopardize the availability of the prohibited transaction relief in the QPAM Exemption. Therefore, to avoid inadvertent failures during the period immediately after an entity begins relying on the QPAM Exemption or changes its name, the Department has revised the proposed provision to provide QPAMs with an initial 90-day period to report to the Department and an additional 90-day period to cure inadvertent failures to report. If the QPAM fails to report within the initial 90-day period, it must submit an explanation during the 90-day cure period for why it failed to provide timely notice. If, at the end of the 180 days, a QPAM still has failed to report, or has not provided the required explanation, the exemption will not be available for transactions that occur until the failure is fully cured. Furthermore, the Department confirms that an isolated instance of failing to report generally would not be considered Prohibited Misconduct that would result in ineligibility under Section I(g)(1)(B).

Several commenters also indicated that the Proposed Amendment did not appear to provide any mechanism for an entity to “de-register” after it initially reports to the Department. In response to this comment, the Department added new language to the end of Section I(k) (Subsection I(g)(1) of the Proposed Amendment) to allow an entity that reported to the Department to notify the Department that it no longer is relying on the exemption. After the Department receives this notice, it will remove the entity from its list of QPAMs that are relying on the QPAM Exemption.

Another commenter recommended that if the Department is seeking a list of entities operating as QPAMs, the Department could assign a new separate identifying code to QPAMs that would be used to report the QPAMs' services to a Plan on Schedule C of the Form 5500. While the Department appreciates this comment and suggestion, modifying the Form 5500 is not part of this amendment, and the Department's objective would not be met using the current Form 5500 for this purpose.

Finally, a proponent of the requirement noted that the Department cannot effectively monitor QPAM compliance if it cannot even identify QPAMs or estimate the number and amount of assets managed by QPAMs. The Department notes that in addition to assisting the Department in monitoring compliance, the reporting requirement will ensure the Department has better information regarding the number of QPAMs that are relying on the exemption, which will provide important data the Department can use to estimate impacts if it considers future amendments to the exemption. Therefore, the Department has retained this requirement in the Final Amendment because it is important for firms that are relying on the exemption to provide identifying information to the Department and for such firms to establish a compliance framework that is sufficient to ensure that they can always satisfy the exemption's conditions.

Written Management Agreement (WMA)—Proposed Subsection I(g)(2)

Subsection I(g) of the Proposed Amendment has been renumbered and the requirements in Proposed Section I(g)(2) are now contained in Section I(i) in this Final Amendment.

As previously stated in this preamble, the fundamental premise of Section I(g) has always been for a QPAM and those in a position to control or influence its policies to act with integrity. The Proposed Amendment included a new requirement for all QPAMs to update their WMAs to include a provision that in the event the QPAM, its Affiliate, or five percent or more owners engage in conduct resulting in a Criminal Conviction or Participation In Prohibited Misconduct, the QPAM would not restrict its client Plans' ability to terminate or withdraw from their arrangement with the QPAM.

The proposed requirement also would have prevented QPAMs from imposing certain fees, penalties, or charges on client Plans in connection with terminating or withdrawing from a QPAM-managed Investment

Fund.

Finally, the Proposed Amendment would have required QPAMs to include a provision in their WMAs that they would indemnify, hold harmless, and promptly restore actual losses to each client Plan for any damages directly resulting from a violation of applicable laws, a breach of contract, or any claim arising out of the failure of such QPAM to remain eligible for relief under the QPAM Exemption as a result of conduct that leads to a Criminal Conviction or Participation in Prohibited Misconduct.

The terms “Criminal Conviction” and “Prohibited Misconduct” are discussed in more detail below.

This would not apply to reasonable fees, appropriately disclosed in advance, that are

specifically designed to prevent generally recognized abusive investment practices or specifically designed to ensure equitable treatment of all investors in a pooled fund in the event such withdrawal or termination may have adverse consequences for all other investors would be excepted. If such fees, penalties, or charges occur, they must be applied consistently and in a like manner to all such investors.

Many commenters expressed concerns with these proposed WMA provisions. They were particularly opposed to the WMA condition being imposed on all QPAMs immediately upon the effective date of the provision, and not only those QPAMs who become ineligible under Section I(g).

Other commenters indicated that these WMA provisions should simply be imposed as conditions that are not required to be included in contracts or as contractual guarantees.

Many commenters used terms such as “disqualified” or “disqualification” in their comment letters to describe ineligibility under Section I(g). The Department has used the terms “ineligibility” and “ineligible” throughout this preamble for consistency with the heading for Section I(g) in this Final Amendment and to avoid confusion that the term “disqualified” indicates that the definition of “qualified professional asset manager” is not satisfied.

Many commenters indicated that the process to update WMAs is difficult and complicated and would take much longer to comply with than the Department's proposed 60-day effective date. Some commenters indicated that at least 18 months would be required to come into compliance, and that the amendment process would be very costly. These commenters noted that even if a manager made only the required amendments to its WMA, such amendments typically would require investor consent, including consent by non-Plan investors who might be adversely affected by the changes. Additionally, if QPAMs were required to include a new indemnification clause in their WMA, commenters indicated that QPAMs would likely also need to update and revise their agreements with many other parties to address the same contingencies that necessitate the new indemnifications and other required changes for their client Plans. Finally, some commenters suggested that if the Department requires QPAMs to include these provisions in their WMAs, the requirement should apply only to contracts that are executed or materially modified after the effective date of the Final Amendment.

After carefully considering these comments, the Department has decided to remove the requirement for all QPAMs to revise their WMAs. Instead, the Department has moved the condition into the Transition Period provision of this Final Amendment. This modification means that after the effective date of the Final Amendment, only QPAMs that become ineligible to rely on the exemption will have to comply with the indemnification and penalty-free withdrawal provisions. As a result, the Final Amendment's Transition Period provision will operate in a similar manner to recent Section I(g) individual exemptions granted by the Department, which have imposed indemnification and penalty-free withdrawal requirements on QPAMs only after they become ineligible under Section I(g).

The Final Amendment indicates that any QPAM that experiences a Section I(g) triggering event must provide client Plans with a One-Year Transition Period and comply with the associated conditions that are discussed below. In this Final Amendment, the Department made some minor non-substantive adjustments to the language in the Proposed Amendment regarding the prohibited transaction relief available and obligations of the QPAM during the Transition Period. The Final Amendment indicates that relief under the exemption during the Transition Period is available for a maximum period of one year after the Ineligibility Date if the QPAM complies with each condition of the exemption throughout the one-year period. No relief will be available for any transactions (including past transactions) effected during the One-Year Transition Period unless the QPAM complies with each condition of the exemption during such one-year period.

A few commenters opined that the requirement that the QPAM agree not to restrict a Plan's ability to withdraw from an Investment Fund that invests in illiquid assets such as a private equity or real estate fund, may present additional challenges and harm Plans' investment returns. The Department understands the additional challenges associated with funds that are less liquid. However, as noted in the Proposed Amendment, a QPAM that faces ineligibility may seek supplemental individual exemption relief from the Department. As also noted in the Proposed Amendment, an applicant may request a more limited scope of relief for a supplemental individual exemption that captures only those transactions that present liquidity problems. The individual exemption process is best suited for addressing those concerns and the Department stresses the importance of submitting an individual exemption application as soon as possible after a QPAM learns that a Section I(g) triggering event is expected to occur. Applying promptly is not only consistent with the QPAM's fiduciary obligations, but also helps ensure that the Department has sufficient time to review the exemption application before the end of the One-Year Transition Period.

Some commenters maintained that QPAMs should not have to indemnify and restore losses beyond what is already required under ERISA because ERISA already provides sufficient protections for Plans to recover losses. The Department disagrees. Until now, the exemption lacked additional safeguards to ensure Plans and IRA owners are not exposed to substantial collateral costs that result from criminal or other misconduct that is beyond their control. When QPAMs breached their obligations and faced the loss of QPAM status, they commonly argued that the Department should grant relief, notwithstanding their misconduct, lest the Plans and IRA owners sustained the collateral costs and injury associated with the loss of QPAM status. The express obligation to indemnify and restore losses caused by the QPAM's own misconduct mitigates this danger and prevents Plans from being locked into disadvantageous relationships with firms that have proved unable or unwilling to meet the exemption's conditions.

Commenters also indicated that client Plans and QPAMs should be allowed to negotiate indemnification because liability and indemnification provisions are often already in place, which are intended to protect Plans if a non-exempt prohibited transaction or breach of fiduciary duty occurs. The Department is concerned that all client Plans do not have the same bargaining leverage to negotiate the type of indemnification provisions included in the Final Amendment. Moreover, such commenters did not provide any specific examples of the types of indemnification provisions that may

already be included in their agreements with Plan customers. Nevertheless, the Department's modification in the Final Amendment to limit the WMA requirements to the Transition Period should mitigate this concern because the requirement will only be imposed upon entities experiencing an event that triggers Section I(g).

Some commenters focused on the term “actual losses” and argued that this standard should not include the costs for Plans to transition to an alternative asset manager because such costs are not normally paid for by a terminated manager. The Department believes that this argument is misplaced. Whether a cost is normally paid for by a terminated manager is not determinative of whether the Department should include a provision in the Final Amendment to protect Plans as mandated by ERISA section 408(a) and Code section 4975(c)(2). When an asset manager becomes ineligible to rely upon the relief provided in the QPAM Exemption due to a violation of Section I(g), which is outside the control of the client Plan, it is appropriate for the wrongdoer to bear the associated costs.

Commenters also noted the ambiguity regarding the full range of costs that are required to be indemnified. Relatedly, commenters indicated that asset managers will be unable to insure against such losses. They argued that it is very difficult, if not impossible, to quantify “investment losses resulting from foregone investment opportunities” for a variety of reasons, including the type of investment manager, the ebbs and flows of investment needs and opportunities, and the costs or needs of a replacement manager.

The Department acknowledges that there is uncertainty regarding the full range of such costs, but notes that it has consistently imposed these indemnification and loss restoration obligations in recent individual exemptions following violations of Section I(g), and that the affected firms have nevertheless chosen to continue acting as QPAMs after receiving relief from the Department. Commenters have provided no evidence that the condition has resulted in the imposition of unwarranted costs upon Plans or QPAMs, or that there had been any significant adverse impacts stemming from imposition of the condition in the context of individual exemptions. Nor have they provided any compelling evidence suggesting that the costs caused by further breaches after felony convictions, or the associated uncertainties, are better borne by the affected Plans than by the QPAMs. In the Department's view, it is wholly appropriate that the QPAM, rather than the Plan, sustain the costs stemming from the QPAM's failure to meet the exemption's conditions or violations of the law. Moreover, by limiting the WMA requirements to the Transition Period provisions in the Final Amendment, the Department sharply reduces the scope of the QPAM's potential liability and the need to determine possible costs up front. As noted above, this Final Amendment simply adopts the same overall approach to Section I(g) ineligibility that has been a core component of the Department's recently granted Section I(g) individual exemptions.

See e.g.,

Exemption From Certain Prohibited Transaction Restrictions Involving Pacific Investment Management Company LLC, 88 FR 42953 (July, 5, 2023); Exemption for Certain Prohibited Transaction Restrictions Involving Citigroup, Inc., 88 FR 4023 (Jan. 23, 2023); Exemption for Certain Prohibited Transaction Restrictions Involving DWS Investment Management Americas, Inc. (DIMA or the Applicant) and Certain Current and Future Asset Management Affiliates of Deutsche Bank AG, 86 FR 20410 (April 18, 2021).

One commenter also noted that the WMA requirement in subsection I(g)(2)(C) of the Proposed Amendment referenced Code section 4975 excise taxes. The commenter indicated that since the indemnification runs to the Plan and a Plan is not liable for excise taxes, this provision does not make sense. After considering this comment, the Department has retained the reference to the excise taxes. This provision is intended to ensure that a QPAM does not impose costs or fees on a Plan in connection with excise taxes incurred by the QPAM.

Finally, a commenter argued that the provision should not cover non-prosecution agreements (NPAs), deferred prosecution agreements (DPAs), or any other ineligibility trigger captured within the definition of Prohibited Misconduct. As discussed below, the Department has modified the scope of NPAs and DPAs captured within the definition of Prohibited Misconduct. The Department believes that conduct severe enough to warrant an NPA or DPA should trigger the same conditions as Criminal Convictions. Therefore, while the Final Amendment reflects the modified scope of the NPAs and DPAs that are affected, the Department declines to remove this protection as it applies to NPAs and DPAs covered under the Final Amendment.

Types of Misconduct and Entities That Cause Ineligibility—Proposed Subsection I(g)(3)

and Sections VI(r) and VI(s)

Subsection I(g)(3) of the Proposed Amendment has been renumbered as Subsection I(g)(1) of the Final Amendment.

Criminal Convictions

Since 1984 when the QPAM Exemption was initially granted, Section I(g) ineligibility has captured convictions of QPAMs, their Affiliates, and five percent or more owners of the QPAM. As noted above, because the Department relies upon the QPAM as a key protection in the exemption, it is critically important that the QPAM, and those who are positioned to influence its policies, maintain a high standard of integrity. QPAMs, affiliates, and related parties that engage in serious criminal misconduct do not display the requisite standard of integrity expected of such entities under the exemption.

While the Department did not propose any changes to the scope of entities captured by Section I(g),

some comments focused on the breadth of Section I(g), including the proposed expansion of Section I(g) to capture the Participation In Prohibited Misconduct by a QPAM, its Affiliates, or its owners of a five (5) percent or more interest. Some commenters noted that the financial services industry has experienced significant consolidation in the decades since the QPAM Exemption was granted, with the result that a QPAM may be a small part of a very large organization. One commenter also suggested that the Department's proposed expansion of the ineligibility provision to include Prohibited Misconduct would impose an unjustified penalty based on the size and complexity of firms relying on the exemption.

The Department recognizes that the proposed inclusion of Prohibited Misconduct may seem to broaden the scope of entities captured, but the Department characterizes that as broadening the scope of misconduct. The Proposed Amendment did not change the five percent ownership threshold or definition of Affiliate that is applicable to Section I(g).

Some commenters contended that existing Section I(g) of the QPAM Exemption results in unjust application of automatic ineligibility. Commenters suggested that Section I(g) should focus on crimes committed by affiliates that are positioned to influence the QPAM's policies or have power or influence to compromise the QPAM's ERISA compliance, or crimes that involve the QPAM itself. According to one commenter, there should be a direct relationship between the crime and the services provided by the QPAM. A

variety of commenters expressed disagreement with what they perceived to be the Department's position,

i.e.,

that remote convictions call a QPAM's integrity into question. These commenters asserted that Section I(g) imposes ineligibility in circumstances where the entities or individuals engaging in criminal conduct are not, in fact, in a position to influence the QPAM's policies. One commenter also opined that remote convictions resulting in ineligibility run counter to the purposes of ERISA section 408(a). Another commenter suggested that the Department should reserve ineligibility only for the most egregious convictions of the QPAM involving ERISA assets. Others preferred the Department's narrow approach in PTE 2020-02 because it limits ineligibility to the entity providing investment advice or other affiliates engaged in the business of providing investment advice to Plans.

At the same time, some of these commenters indicated that inclusion of criminal convictions as an ineligibility trigger at the QPAM entity level could be appropriate. Similarly, some commenters agreed that crimes committed by a parent entity that can exercise management and control over the QPAM's day-to-day business and decision-making could be relevant for an ineligibility provision based on criminal convictions. A few commenters suggested that the Department rely on the “controlled group of corporations” or “under common control” standards as defined in Code section 414(b) and (c) if it decides to retain the current breadth of Section I(g).

The Department disagrees with the suggestion that disqualification is appropriate only when the QPAM itself was directly involved in the crime or only when the crime specifically involves plan assets or services to ERISA-covered plans. Serious crimes of the sort enumerated in Section I(g) are directly relevant to a corporate family's culture of compliance. When a company with multiple affiliated entities has engaged in such conduct or ignored criminal misconduct when it is occurring (or possibly even endorsed the misconduct), the likelihood that the same or similar conduct will be ignored when engaged in at the QPAM entity increases. This is particularly true where the bad actor is the corporate parent of the QPAM, but also rings true when it is an affiliated company that is controlled by the same corporate parent as the QPAM.

Affiliated and related companies commonly hold themselves out as an integrated entity, have common or overlapping supervisory and control structures, and share a common corporate culture. Accordingly, serious criminal misconduct is a red flag indicating potential compliance problems that extend beyond the specific actors that directly engaged in the misconduct. Similarly, the commission of any of the enumerated criminal offenses is relevant to the assessment of likely future misconduct beyond the narrow confines of the particular customers and service providers directly affected by the conduct that resulted in a conviction. If, for example, a company engaged in embezzlement or price-fixing with respect to non-plan customers, there is little basis for plan customers to be sanguine about the improbability of such conduct with respect to plan customers and plan assets.

Moreover, the practical impact of the exemption's disqualification provisions is not that QPAMs are precluded from making their case to the Department that the criminal conviction should not result in a lengthy bar from reliance on the exemption. Rather, the consequence is that the disqualified QPAM would have to apply for an individual exemption if it wishes to rely on the class exemption for a period that extends beyond the Transition Period. In the context of such an individual exemption application, the QPAM would be in a better position to present evidence on the scope of its involvement in the criminal conduct, its independence from any bad actors, current corporate culture and compliance structures, and other information relevant to assessing whether it should be permitted to continue relying on this exemption, notwithstanding the conviction. Similarly, the Department would have the time and ability to consider such issues on a case-specific and context-sensitive basis that takes into account the evidence submitted as part of a formal record. Also, based on the Department's experience processing individual exemption applications, many of the convictions and criminal misconduct the Department has dealt with over the past decade have not involved conduct that is isolated to remotely related affiliates within the QPAM's corporate ownership structure.

Even in situations where the convicted entity appeared remote, the Department has seen pervasive compliance failures at various other entities within the corporate family, including at parent entities.

Financial Industry Consolidation

The Department recognizes that the legal landscape for the financial services industry has changed since 1984. When the QPAM Exemption was originally granted, there were established legal and regulatory barriers in the U.S. that prevented banking, securities, and insurance companies from consolidating. However, the passage of the Graham-Leach-Bliley Act in 1999

removed these barriers, which led many commercial banks, investment banks, securities firms, and insurance companies to consolidate. The Department understands that significant consolidation has occurred since 1999 and that the scope of entities captured by Section I(g) has not been revisited since those and other changes occurred in the financial services industry. The Department continues to stand by the original premise for Section I(g), which largely is focused on entities who are in control-based relationships with a QPAM, can influence the activities of a QPAM or are likely to share a common corporate culture.

Public Law 106-102; 113 Stat. 1338.

The Department reminds QPAMs, as it did in the Proposed Amendment, that control-based relationships remain directly relevant for triggering ineligibility under Section I(g) because of the Affiliate definition.

Meaningful control can exist even when entities that have small ownership interests in a QPAM are positioned to influence the QPAM's decision to engage or refrain from engaging in conduct that can form the basis for a Criminal Conviction or Participation In Prohibited Misconduct. The Department continues to believe that corporate malfeasance at entities that control, are under common control with, or are controlled by the QPAM indicates the possibility of increased risk of harm to client Plans and IRA owners . The Department notes that a controlling relationship exists when one entity directly or indirectly has or exercises a significant influence over the management or policies of another entity. Control in this context does not require that the first entity has the ability to exercise complete domination or absolute authority over all aspects of the management or policies of the second entity.

The Affiliate definition continues to include “[a]ny person directly or indirectly through one or more intermediaries, controlling, controlled by, or under common control with” the QPAM.

See

Section VI(d) for a complete definition.

Foreign Criminal Convictions

The Department has a longstanding practice of considering individual exemption applications from QPAMs in connection with foreign

convictions.

The Proposed Amendment would have added a definition of Criminal Conviction that was intended to remove any doubt that Section I(g) applies to foreign convictions that are substantially equivalent to the listed U.S. federal or state crimes. In the Proposed Amendment, the Department specifically requested comments on this section, including whether there are certain types or aspects of criminal behavior that deserve additional focus. The Department also indicated that QPAMs should interpret the scope of this provision broadly with respect to foreign convictions and consistent with the Department's statutorily mandated focus on the protection of Plans in ERISA section 408(a) and Code section 4975(c)(2).

See, e.g.,

Prohibited Transaction Exemption (PTE) 2020-01, 85 FR 8020 (Feb. 12, 2020); PTE

2019-01, 84 FR 6163 (Feb. 26, 2019); PTE 2016-11, 81 FR 75150 (Oct. 28, 2016); PTE 2016-10, 81 FR 75147 (Oct. 28, 2016); PTE 2012-08, 77 FR 19344 (March 30, 2012); PTE 2004-13, 69 FR 54812 (Sept. 10, 2004); and PTE 96-62 (“EXPRO”) Final Authorization Numbers 2003-10E, 2001-02E, and 2000-30E, available at

https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/exemptions/expro-exemptions-under-pte-96-62.

The Department stated that in situations where a crime raises particularly unique issues related to the substantial equivalence of the foreign Criminal Conviction, the QPAM may seek the Department's views regarding whether the foreign crime, conviction, or misconduct is substantially equivalent to a U.S. federal or state crime. However, the Department cautioned that any QPAM submitting a request for review should do so promptly, and whenever possible, before a judgment is entered in a foreign conviction so the QPAM has sufficient time to complete the notice obligations under the One-Year Transition Period.

The Department also requested comment on whether there should be an additional process for requesting the Department's determination regarding whether a foreign conviction is substantially equivalent to a domestic conviction. The Department asked whether particular factors, such as the elements of the crime and the nature of the tribunal or investigating entity, should be considered in making such a determination.

Many commenters provided input regarding the explicit inclusion of foreign crimes in the Proposed Amendment. At least one commenter indicated that it did not agree that the status of foreign convictions under Section I(g) (as it has existed since 1984) has been a settled matter. As amended, Section I(g) will remove all doubt regarding the coverage of foreign criminal convictions, which are now specifically referenced in the exemption's text.

Some commenters indicated that the Proposed Amendment did not provide the intended certainty regarding foreign convictions because there could be difficulty determining whether any given foreign crime is a felony, or whether it is substantially equivalent to a felony under U.S. law.

Some commenters also expressed skepticism that the Department has the competence and jurisdiction to interpret foreign law fairly and accurately for these purposes. A variety of commenters also raised questions regarding the proposed “substantially equivalent” standard, and expressed concern that foreign jurisdictions may not adhere to basic due process protections. Multiple commenters suggested that the Department should establish a formal process by which a QPAM may request a determination from the Department regarding whether a foreign conviction is substantially equivalent to a domestic conviction before it results in ineligibility. One commenter recommended that this should include an opportunity for the QPAM to present its position as to why a foreign conviction may not be substantially equivalent to a domestic conviction. Another commenter suggested the “substantially equivalent” standard for foreign criminal convictions should apply only where the factual record of such conviction, when applied to United States federal criminal law, would likely lead to a criminal conviction in the United States. Other commenters expressed further concerns that the Proposed Amendment would inappropriately equate criminal convictions levied in countries that have less robust or reliable legal systems with those convictions handed down by U.S. courts. One commenter suggested that the Proposed Amendment has the potential to play into the hands of foreign nations that intend to harm investment managers having substantial operations in the United States or its allies. The Department notes that although the crimes listed explicitly in Section I(g) use the term “felony,” the crimes adopted by reference from ERISA section 411 are not, nor have they ever been, limited to felonies.

One commenter also noted that several jurisdictions such as the United Kingdom, Canada, Ireland, Australia, and New Zealand do not rely on a legal category of “felony” which could compound issues for making a substantially equivalent determination in such cases.

To add clarity and ensure consistency between Section (r)(1) and (r)(2), the Department added the phrase “or released from imprisonment, whichever is later” to the sentence, “(r) `Criminal Conviction' means the person or entity that: (2) is convicted by a foreign court of competent jurisdiction or released from imprisonment, whichever is later, as a result of a crime, however denominated by the laws of the relevant foreign government, that is substantially equivalent to an offense described in (r)(1), above. . . .”

With respect to the “substantially equivalent” standard for foreign crimes, the Department did not add a formal process to the Final Amendment to make such determinations. The Department does not expect that questions of this nature will arise frequently, but when they do, impacted entities may contact the Office of Exemption Determinations for guidance, as they have done for many years. In general, the Department has not had difficulty determining whether the foreign crimes were substantially equivalent to domestic crimes and does not expect to have any difficulty with these determinations in the future. Additionally, the One-Year Transition Period, and the ability to apply for an individual exemption, provide parties with the time and the opportunity to address any issues about the import of any specific foreign conviction and its relevance to ongoing relief from full application of the prohibited transaction provisions. The Department is not aware that any convictions have occurred in foreign nations with the intent to harm U.S.-based investment managers and believes there is a low likelihood that this has occurred. Further, the types of foreign crimes that the Department has seen in recent QPAM individual exemption requests have consistently related to the subject financial institution's management of financial transactions and/or culture of compliance. These underlying foreign crimes have included the following:

• attempting to peg, fix, or stabilize the price of an equity in anticipation of a block offering in Japan (PTE 2023-13, 88 FR 26336 (April 28, 2023));

• illicit solicitation and money laundering for the purposes aiding tax evasion in France (PTE 2019-01, 84 FR 6163 (February 26, 2019)); and

• spot/futures-linked market price manipulation in South Korea (PTE 2015-15, 80 FR 53574 (September 4, 2015)).

Nevertheless, to address the concern expressed in the public comments that convictions have occurred in foreign nations with the intent to harm U.S.-based investment managers, the Department has revised the definition Criminal Conviction in Section VI(r)(2) of this Final Amendment to exclude

foreign convictions and imprisonments that occur within foreign jurisdictions that are included on the Department of Commerce's list of “foreign adversaries.”

15 CFR 7.4. The list of foreign adversaries currently includes the following foreign governments and non-government persons: The People's Republic of China, including the Hong Kong Special Administrative Region (China); the Republic of Cuba (Cuba); the Islamic Republic of Iran (Iran); the Democratic People's Republic of Korea (North Korea); the Russian Federation (Russia); and Venezuelan politician Nicolás Maduro (Maduro Regime). The Secretary of Commerce's determination is based on multiple sources, including the National Security Strategy of the United States, the Office of the Director of National Intelligence's 2016-2019 Worldwide Threat Assessments of the U.S. Intelligence Community, and the 2018 National Cyber Strategy of the United States of America, as well as other reports and assessments from the U.S. Intelligence Community, the U.S. Departments of Justice, State and Homeland Security, and other relevant sources. The Secretary of Commerce periodically reviews this list in consultation with appropriate agency heads and may add to, subtract from, supplement, or otherwise amend the list. Section VI(r)(2) of the Final Amendment will automatically adjust to reflect amendments the Secretary of Commerce makes to the list.

A few commenters also indicated that the proposed changes to Section I(g) are unnecessarily broad in application and will impose unnecessary costs and burdens on Plans. The Department's experience, however, is that the overall number of QPAMs and client Plans that have been impacted by Section I(g) violations has been small compared to the total number of QPAMs and client Plans,

and the Department believes that this will continue to be the case. Thus, there should not be a significant change to the costs or burdens imposed on Plans as a result of explicitly including foreign convictions in Section I(g). In any event, when misconduct rises to the level that it results in ineligibility under Section I(g), the resultant costs and burdens are appropriate to ensure that a QPAM's client Plans are adequately protected when a QPAM becomes ineligible.

This belief is based on the number of QPAMs suggested by commenters and represented in an updated estimate in this Final Amendment versus the number of QPAMs and client Plans identified in individual exemption applications.

Some commenters recognized that when the foreign affiliate itself is providing investment management services to a Plan, the integrity of the foreign affiliate may be relevant. Commenters indicated that if the Department includes foreign convictions, ineligibility should be limited at least to entities that fall into the tax code definition of “Controlled Group” with respect to a QPAM. The Department appreciates the recognition by these commenters that at least some misconduct in foreign jurisdictions is relevant to the QPAM's integrity. However, the Department disagrees that the correct standard for determining when misconduct could be relevant should be limited to the “Controlled Group” definition. The Department believes that the approach taken in the exemption with regards to the scope of entities captured by Section I(g) in the ownership test and definition of Affiliate provides significant protections for Plans and participants and the commenter has not provided a reasoned basis why altering this scope would provide additional protections. Therefore, the Department has not altered the scope of entities captured by Section I(g) with respect to Criminal Convictions.

Proponents of the Proposed Amendment's addition of foreign crimes to Section I(g) indicated that large financial institutions that engage in financial crimes usually do so across multiple jurisdictions, arbitraging regulatory loopholes and pressuring weaker jurisdictions to curtail regulation. They urged the Department not to ignore foreign activity due to the modern realities of multinational financial institutions.

The Department agrees that criminal convictions for the types of crimes identified in the QPAM Exemption are relevant to a QPAM's willingness and ability to manage Plan assets with integrity, care, and undivided loyalty, regardless of whether the crime occurs in a domestic or foreign jurisdiction. Foreign crimes of the sort described in the Final Amendment call into question a firm's culture of compliance just as much as domestic crimes. Fraud, embezzlement, tax evasion, and the other listed crimes are signs of potential serious compliance and integrity failures, whether prosecuted domestically or in foreign jurisdictions. In the modern era of increased globalization and multinational companies, corporate parents and affiliates may reside in jurisdictions other than the United States. Their criminal misconduct in other jurisdictions is no less concerning to the Department than when such misconduct occurs in the United States. In fact, if foreign convictions were not included in Section I(g), the exemption would potentially impose more lenient conditions on foreign-based conglomerates than it does on U.S.-based entities, which is not the Department's intention, because it is not sufficiently protective of Plans.

A few commenters suggested alternatives to the Department's approach to foreign convictions in the Proposed Amendment. One commenter suggested that the Department should adopt an approach modeled after the Security and Exchange Commission's (SEC's) consideration of foreign crimes when determining whether to disqualify persons from serving in various capacities at an Investment Company under the Investment Company Act of 1940. It is the Department's understanding that, under the Investment Company Act of 1940, disqualification is automatic for specified domestic crimes, but that the SEC provides notice and a hearing before disqualification for foreign crimes.

See

Investment Company Act of 1940, 15 U.S.C. 80a-9.

After consideration of the comment and the differences in statutory text and purposes at issue under ERISA, the Code, and the Investment Company Act of 1940, the Department has decided not to adopt the commenter's suggestion. The QPAM Exemption permits entities to enter into transactions that ERISA and the Code otherwise prohibit because of the danger they pose to Plans, their plan participants and beneficiaries, and IRA Owners. Before the Department grants an exemption from the law's strict prohibitions, it has an obligation to find that the exemption is in the interest of participants and protective of their rights. Under the QPAM Exemption, these findings crucially turn on the financial institution's culture of compliance. Misconduct that results in a criminal conviction of an entity under Section I(g) of the QPAM Exemption, whether domestic or foreign, calls into serious question whether the QPAM has the integrity and culture of compliance on which the exemption is premised. Accordingly, after conviction of a serious crime, a financial institution, its affiliates, and related parties should not expect to have the automatic right to continue to engage in transactions that are otherwise illegal, but for the exemption. Nevertheless, the firm may always apply to the Department for an individual exemption based on a full and fair consideration of the firm's criminal conduct and the relevant facts, circumstances, and context, if the firm believes that it should still receive a dispensation from application of the otherwise generally applicable prohibited transaction provisions, as companies have done over the years.

Relatedly, a commenter suggested the QPAM could be required to certify that its failure to meet the requirements of the QPAM Exemption arose solely from the foreign affiliate's criminal conduct and that no entities holding Plan assets

actively Participated In the criminal conduct that is the subject of the conviction. Based on the certification, the Department could inquire further and make its decision based on the facts of the specific situation. Another alternative offered by a commenter was simply to require a QPAM to notify a Plan of the conviction, and then allow the Plan sponsor to decide whether to continue its arrangement with the QPAM.

The Department's focus is on the protection of Plans and their participants and beneficiaries, as it decides whether to give QPAMs relief from the requirements of otherwise applicable law (

i.e.,

the categorical prohibitions of ERISA Section 406(a) and Code section 4975(c)(1)). The Department declines to take the other recommended approaches because as explained in other parts of this preamble, the Department is not merely concerned about crimes that have already impacted Plan assets, but compliance frameworks that have an increased potential to place Plan assets at risk. Criminal Convictions, even in foreign jurisdictions, for the types of crimes and by the entities captured by Section I(g) raise significant concerns. The Department disagrees with the suggestion that it would be sufficiently protective of Plans, their participants, and beneficiaries simply to require notice of the QPAM's criminal conviction and leave it to the fiduciaries to decide whether to engage in otherwise prohibited transactions with the QPAM. When Congress enacted ERISA, it chose not to broadly empower plan fiduciaries to opt out of the prohibited transaction provisions on a voluntary basis, but rather charged the Department with the responsibility to craft protective conditions that meet the statutory standards set forth in ERISA section 408(a).

The crimes enumerated in Section I(g) are serious violations that call into question the willingness and ability of the QPAM to adhere consistently to the fiduciary norms and standards that are critical to entrusting them with license to engage in otherwise illegal transactions. To the extent a QPAM believes that it should be permitted to engage in such transactions after the expiration of the Transition Period, notwithstanding its conviction, the Department has concluded that the interests of Plan participants and beneficiaries and IRA Owners are best protected by the procedural protections, public record, and notice and comment process associated with individual exemption applications. In the context of an individual exemption application, the Department has unique authority to efficiently gather evidence, consider the issues, and craft protective conditions that meet the statutory standard. If the Department concludes, consistent with the statutory standards set forth in ERISA 408(a) and Code section 4975(c)(2), that an individual exemption is appropriate, Plan fiduciaries remain free to make their own independent determinations whether to engage in transactions with the QPAM. In the first instance, however, the Department must consider the unique facts and circumstances surrounding the conviction based on its statutory role and obligations, and craft appropriate conditions if it appears that an exemption is proper. The Department has a critical role in providing appropriate regulatory protections, even in situations where a Plan fiduciary has some authority, discretion, and obligations of its own.

Prohibited Misconduct

The Department proposed to add a new category of misconduct that could lead to ineligibility under Section I(g), described as “participating in Prohibited Misconduct.”

Proposed Section VI(s) defined Prohibited Misconduct as:

As proposed, this definition applied to Participation In Prohibited Misconduct by the QPAM or its five percent or more owners and Affiliates.

(1) any conduct that forms the basis for a non-prosecution or deferred prosecution agreement that, if successfully prosecuted, would have constituted a crime described in Section VI(r);

(2) any conduct that forms the basis for an agreement, however denominated by the laws of the relevant foreign government, that is substantially equivalent to a non-prosecution agreement or deferred prosecution agreement described in subsection VI(s)(1);

(3) engaging in a systematic pattern or practice of violating the conditions of this exemption in connection with otherwise non-exempt prohibited transactions;

(4) intentionally violating the conditions of this exemption in connection with otherwise non-exempt prohibited transactions; or

(5) providing materially misleading information to the Department in connection with the conditions of the exemption.

The Department explained in the preamble of the Proposed Amendment that the term “participating in” referred not only to actively participating in the Prohibited Misconduct but also to knowingly approving of the conduct or having knowledge of such conduct without taking appropriate and proactive steps to prevent such conduct from occurring, including reporting the conduct to appropriate compliance personnel. The Department proposed that, where a QPAM's ineligibility is linked to Prohibited Misconduct under any portion of Section VI(s), the Department would provide affected entities with a written warning and an opportunity to be heard.

The Department requested comments on the extent to which Proposed Section VI(s) was appropriately tailored to target non-criminal activity by the QPAM (or its owners of a five (5) percent or more interest, or Affiliates) that raised integrity issues that had the potential to harm Plans and whether additional or alternative elements were warranted. The Department also requested comments regarding whether to add any conduct as Prohibited Misconduct, and if so, to include an explanation for how such actions would implicate a QPAM's integrity. The Department also requested comments as to whether any of the proposed Prohibited Misconduct should be removed and an explanation of why such conduct does not affect the QPAM's integrity.

With respect to these provisions, the Department explained in the Proposed Amendment that it intended to rely on its enforcement authority and program to detect a QPAM's Participation In the types of Prohibited Misconduct included in proposed subsections VI(s)(3) through (5).

In the Proposed Amendment, the Department built in due process components so that ineligibility would occur only in limited circumstances, and even in those circumstances, the process to make the QPAM ineligible would have begun only after two initial steps: (1) an investigation by the appropriate field office, and (2) receipt by the QPAM thereafter of a written warning that the Department was contemplating issuing a Written Ineligibility Notice. The Proposed Amendment's Written Ineligibility Notice process would have allowed the QPAM the opportunity to be heard before the Department were to issue an actual notice, which would have made the QPAM ineligible to use the exemption from the date the Department issued the notice, except that the mandatory One-Year Transition Period would have been applicable in the same manner as with ineligibility caused by a Criminal Conviction.

Section VI(s) has been renumbered in the Final Amendment as section VI(s)(1), (2)(A), (B), and (C).

General Comments on Proposed Prohibited Misconduct Provision

One supporter of the Proposed Amendment indicated that inclusion of additional categories of misconduct was appropriate because the commenter

believed that Section I(g)'s limited focus on crimes that resulted in a conviction had contributed to serial misconduct by corporate wrongdoers. The commenter expressed concern that some corporate wrongdoers could take advantage of loopholes to avoid a conviction when the conduct was ultimately serious enough to warrant a conviction.

Many opponents of the amendment recommended that the “Prohibited Misconduct” standard and provisions be deleted entirely. They stated that the expansion of Section I(g) to include Prohibited Misconduct erodes certainty that the QPAM Exemption provides regarding eligibility.

Specific Comments Regarding Including Non-Prosecution Agreements (NPAs) and Deferred Prosecution Agreements (DPAs) as Prohibited Misconduct

Some commenters recommended that the Department consult with the Department of Justice (DOJ) and the SEC to get a better sense of how the proposed inclusion of NPAs and DPAs as Prohibited Misconduct would impact their enforcement abilities. Some commenters also noted that financial institutions may agree to a NPA or DPA for reasons that are unrelated to ERISA. These commenters opined that the Department seemed to be mischaracterizing the nature and use of NPAs and DPAs, as well as their objectives (such as avoiding the collateral consequences of penalizing innocent parties). According to some commenters, prosecutors do not enter into these agreements lightly or with the intention of allowing financial institutions to “sidestep” the consequences of their actions. Some commenters also asserted that even where an institution believes it has not engaged in wrongdoing and would prevail on the merits in a court of law, they may prefer to enter into a NPA or DPA for a variety of reasons. For example, one commenter indicated that even where an institution believes it has not engaged in wrongdoing and would prevail on the merits in a court of law, it may prefer to enter into a NPA or DPA if it is concerned with its reputation on unrelated matters (that do not rise to the level of covered convictions) that could be introduced during a protracted trial.

Some commenters also offered alternatives to ineligibility in connection with NPAs or DPAs. For instance, one commenter suggested that the Department could require a QPAM that enters into one of these agreements to notify each Plan it manages that: (1) the QPAM has entered such an agreement; and (2) the Plan can terminate its relationship with the QPAM if it chooses to do so, without penalty.

Some commenters expressed additional concern that financial institutions will be less willing to enter into NPAs or DPAs if doing so would result in ineligibility under the QPAM Exemption. These commenters indicated that they believed this outcome may not be in the public interest. For instance, one commenter suggested that if entering into a DPA or NPA would effectively end a firm's ERISA investment management business, the firm may not be able to enter into the agreement, even when doing so is the best resolution for the government prosecutor involved.

A proponent of the Department's Proposed Amendment to include NPAs and DPAs as ineligibility triggers noted that since the exemption was proposed in 1982, the use of NPAs and DPAs has skyrocketed, with many companies avoiding prosecution for serious misconduct due to factors unrelated to their culpability. The commenter opined that to fully protect Plans from unscrupulous behavior by asset managers, the Department must, as proposed, include NPAs and DPAs within the definition of Prohibited Misconduct that triggers QPAM ineligibility when the conduct at issue involves a listed crime.

Another commenter identified a lack of clarity as to whether an NPA or DPA would have to involve the manager's parent or whether it could involve the manager's most remote affiliate or an entity with only a five percent ownership interest in the manager.

Several commenters also expressed specific concerns over expanding QPAM ineligibility to agreements with foreign governments that are substantially equivalent to domestic NPAs and DPA. These commenters expressed concern that the proposal provided the Department with unfettered discretion to determine whether a foreign NPA or DPA entered into by the QPAM or an Affiliate was substantially equivalent to a domestic NPA or DPA, and they questioned whether the Department has the necessary proficiency in criminal justice and international law, or jurisdictional authority to make such determinations.

Other commenters also suggested that it would be difficult for the Department to apply the substantially equivalent standard in the context of foreign NPAs and DPAs due to the claimed vagaries of foreign laws and prosecutorial practices and the effect of expanding the reach of Section I(g) in this manner on law enforcement efforts by other U.S. agencies and the possible extraterritorial impact on non-U.S. law enforcement and U.S. relations with foreign governments.

One commenter stated that Department should not treat the conduct of an affiliate which has no or little nexus or relationship to the QPAM as disqualifying and pointed out the practical considerations that are necessary to identifying foreign equivalents of these agreements as well as the significant risk that these agreements may be imposed in foreign jurisdictions that do not provide due process protections. Another commenter asserted that the connection of foreign agreements to a QPAM's compliance culture is speculative and tenuous and does not provide any meaningful protection to participants and beneficiaries.

One commenter claimed that including foreign equivalents of NPAs and DPAs has the potential to play into the hands of foreign nations that wish to harm the operations of U.S.-based investment managers. For example, the commenter suggested that rogue foreign nations could bring dubious claims against a U.S.-based investment manager and force them to execute a DPA or NPA with that government in order to continue operations in that foreign country.

Another commenter questioned how the Department would know if something would be “successfully” prosecuted for purposes of the requirement in Section VI(s) that the NPA or DPA be based on allegations that, if successfully prosecuted, would have constituted a crime described in Section VI(r) of the exemption.

The Department's Response to Comments and Treatment of DPAs and NPAs Under the Final Amendment

In response to these comments, the Department consulted with the DOJ and the SEC to affirm its understanding of NPAs and DPAs, particularly the level of culpability on the part of the QPAM that would accompany such an agreement. Based on these consultations, the Department understands that, as a matter of course, these domestic NPAs and DPAs are accompanied by Statements of Fact that establish the basis for criminal liability. In most cases, the offending party avoids prosecution for the crime on the basis of the party's agreement to enter into, and comply with, the terms of the agreement.

After considering comments on the Proposed Amendment's inclusion of NPAs and DPAs as Prohibited Misconduct in the Proposed Amendment, the Department has

determined to include this provision in the Final Amendment with a modification discussed below.

In cases where the QPAM, any Affiliate thereof (as defined in Section VI(d)), or any owner, direct or indirect, of a five (5) percent or more interest in the QPAM has executed an NPA or DPA, the Department has precisely the same concerns about the QPAM's compliance culture, and its ability and willingness to adhere to its fiduciary obligations and the exemption conditions, as it does when any of these parties have been formally convicted of the crime. The cause for concern about the QPAM is not the conviction

per se,

but rather the serious misconduct that underlies the conviction. In these cases, responsible federal or state officials have resolved serious claims of misconduct against parties through the execution of a formal agreement voluntarily entered into with the parties. In these circumstances, if the alleged misconduct is sufficient to form the basis for an NPA or DPA that is entered into by the QPAM, any Affiliate thereof (as defined in Section VI(d)), or any owner, direct or indirect, of a five (5) percent or more interest in the QPAM, it is appropriate to treat the agreement as cause for ineligibility under Section I(g), subject to the parties' ability to apply for an individual exemption before, during, or after the One-Year Transition Period provided for in this exemption.

Moreover, any due process concerns with including NPAs and DPAs as Prohibited Misconduct are addressed by the change to the Prohibited Misconduct provision in the Final Amendment providing that ineligibility does not occur until after a QPAM, any Affiliate thereof (as defined in Section VI(d)), or any owner, direct or indirect, of a five (5) percent or more interest in the QPAM has executed an NPA or DPA. Those agreements result from criminal investigations and are voluntarily entered into by the parties. QPAMs and other affected entities that enter into an NPA or DPA generally will be afforded the numerous due process protections that are associated with criminal investigations and negotiating these agreements.

Under the revised provision in the Final Amendment, QPAMs, their Affiliates, or five (5) percent or more owners that enter into an NPA or DPA should have sufficient time to prepare for the implications of becoming ineligible under this Final Amendment as a result of the process surrounding the negotiation and execution of the agreement. In either case, the QPAM must commence the One-Year Transition Period and submit an individual exemption application for extended relief a soon as possible if it wants to continue using the QPAM exemption after the One-Year Transition Period expires.

After considering comments on the Proposed Amendment's inclusion of foreign-equivalent NPAs and DPAs in the Proposed Prohibited Misconduct definition, the Department has decided to remove foreign equivalent agreements from the definition of Prohibited Misconduct in Section VI(s) of the Final Amendment. While the Department is confident in its ability to apply the foreign equivalence standard to NPAs and DPAs entered into by the QPAM or its Affiliates, and although the Department has concerns about conduct that might give rise to a foreign equivalent NPA or DPA, it has concluded that it has insufficient information on those agreements to treat them as a cause for ineligibility under Section I(g). In this context, the Department notes that it has not received individual exemption requests from QPAMs or their Affiliates in which a foreign equivalent agreement was implicated.

The Department also is not aware of any instances where foreign governments have used agreements that are substantially equivalent to domestic NPAs and DPAs to harm U.S.-based investment managers and, as with foreign criminal convictions, we believe there is a low likelihood that this activity has occurred. However, in light of the comments, the Department has concluded that it does not have sufficient certainty about the use of these agreements outside the U.S., and about the procedural protections associated with the agreements in foreign jurisdictions, to justify finalizing this particular part of the proposed Prohibited Misconduct provision at this time. Therefore, the Department's position is that the uncertainties surrounding foreign agreements raised by some commenters outweigh the protective benefits that would accrue to Plans and their participants and beneficiaries by including foreign agreements in the Prohibited Misconduct provision.

Although the Department is removing the foreign equivalent of NPAs or DPAs as an ineligibility trigger, the Final Amendment to Section I(g)(2) requires the QPAM to notify the Department when the QPAM, any Affiliate thereof (as defined in Section VI(d)), or any owner, direct or indirect, of a five (5) percent or more interest in the QPAM executes a domestic or foreign equivalent NPA or DPA. This notice will give the Department the ability to take appropriate additional action in specific cases and will provide the Department with broader information about these practices as the QPAM exemption continues to be relied upon by parties in the future. The Department notes that QPAMs should err on the side of caution when determining whether an agreement with a foreign government entity is the substantial equivalent of a domestic NPA or DPA that must be reported to the Department pursuant to amended Section I(g)(2).

After reviewing and considering the comments offering alternatives to ineligibility in connection with NPAs or DPAs, in particular only requiring QPAMs to provide a notice to Plans, the Department's position is that mere notice to the Plans is not sufficiently protective to address circumstances where a NPA or DPA with a U.S. federal or state prosecutor's office or regulatory agency reflects serious misconduct by the QPAM. Further, solely relying on a QPAM's notification to Plans that the QPAM committed serious misconduct would not be an appropriate justification for the Department to ignore such serious misconduct and to forego taking appropriate action.

In response to the comment asserting that a lack of clarity exists regarding whether an NPA or DPA would have to involve the QPAM's parent or whether it could involve the QPAM's most remote affiliate or an entity with only a five (5) percent ownership interest in the manager, the Department has clarified in the Final Amendment that the Prohibited Misconduct provision in Section VI(s)(1) includes NPAs and DPAs entered into by the QPAM, or any Affiliates, or owners of five (5) percent or more of the QPAM, with a U.S. federal or state prosecutor's office or regulatory agency.

In response to comments that questioned how the Department would know if something would be “successfully” prosecuted, the Department notes that the focus of the provision is not on whether a criminal prosecution would have been successful if the case had not been settled, but rather whether the allegations by state or federal officials that resulted in the NPA or DPA described one of the disqualifying crimes set forth in VI(r). The provision does not require the Department to know if something would be successfully prosecuted. Instead, it requires the Department to determine whether the conduct associated with the NPA or DPA would “if successfully prosecuted” constitute Prohibited Misconduct as defined in paragraph VI(s)(1). In such cases, the parties have

voluntarily entered into a settlement based on allegations of disqualifying misconduct. There is sufficient cause for concern in all such cases about the entities' culture of compliance to trigger ineligibility, start the One-Year Transition Period, and require the parties to seek an individual exemption if they would like to continue to receive an exemption permitting them to engage in conduct that is otherwise prohibited by ERISA and the Code. Moreover, as noted above, NPAs and DPAs are commonly supported by Statements of Fact that establish the basis for criminal liability by the parties entering into the agreements.

While the Department is removing foreign equivalents of NPAs and DPAs as Section I(g) ineligibility events in the Final Amendment, as discussed above it is adding a notice requirement that applies when the QPAM, its owners of a five (5) percent or more

interest,

or Affiliates enter into a foreign equivalent of an NPA or DPA or Participate In Prohibited Misconduct as defined in Section VI(s). Specifically, Section I(g)(2) requires the QPAM to submit a notice to

QPAM@dol.gov

within 30 calendar days after the Ineligibility Date for the Prohibited Misconduct as determined under Section (I)(h)(2) or the execution date of the substantially-equivalent foreign NPA or DPA, if the QPAM, any Affiliate thereof (as defined in Section VI(d)), or any owner, direct or indirect, of a five (5) percent or more interest in the QPAM, Participates In any Prohibited Misconduct as defined in Section VI(s) or enters into an agreement with a foreign government that is substantially equivalent to a NPA or DPA described in section VI(s)(1). The QPAM must include a description of the Prohibited Misconduct in the notice and provide the name of and contact information for the person or entity that is responsible for handling this matter to the Department.

The Department clarifies that the Prohibited Misconduct conditions in Section VI(s)(1), regarding entering into an NPA or DPA with a U.S. federal or state prosecutor's office or regulatory agency, and the corresponding notification requirement in Section I(g)(2), are prospective only, and therefore only apply to QPAMs, their Affiliates, and owners of a five (5) percent or more interest who have executed NPAs or DPAs on or after June 17, 2024 based on facts that, if successfully prosecuted, would have constituted a crime specified in VI(r) of the Final Amendment.

Specific Comments Regarding Prohibited Misconduct Under the Written Warning Letter and Ineligibility Notice Process

In the Proposed Amendment, the Department specifically requested comments on the sufficiency of the due process protections provided in connection with the Prohibited Misconduct provision. Several commenters expressed concern that the due process protections of the written warning letter and Written Ineligibility Notice provisions were insufficient. For example, some commenters stated that:

• the proposed standards were inadequate to protect the due process rights of QPAMs, because the process provided the Department with potentially unlimited discretion to decide what types of misconduct would trigger ineligibility to be made by an independent, disinterested decision-maker;

• the Department's ineligibility process lacks sufficient due process and a final determination by a neutral third-party judge, and therefore, provides the Department with unilateral discretion;

• due process requires an adversarial process that is adjudicated by an independent third party;

• if the ineligibility process for Prohibited Misconduct is retained, the Department should develop a process that includes: (1) rules for establishing a factual record, including adequate time and opportunity for the accused institution to review, challenge, and supplement the record; (2) formal rules for soliciting input from federal, state, and/or foreign prosecutors involved in the negotiated agreement at issue, if any; (3) procedures for selecting an independent decision-maker responsible for making factual and legal determinations; (4) procedural guardrails to ensure that Department officials involved in alleging Prohibited Misconduct are not able to engage in conduct that would bias the decision-maker (

e.g.,

prohibiting ex parte communications); and (5) an automatic stay of any agency determinations during the pendency of federal litigation challenging the determination;

• If the Department does not remove the written warning letter and Written Ineligibility Notice process from the final exemption, the final exemption must provide an opportunity for review by an administrative law judge, court, or similar truly independent decision maker with the authority to decide whether a QPAM will be disqualified, as opposed to providing that authority to itself.

Additionally, some commenters expressed concern that proposed definition of the phrase “participating in” was vague and overbroad.

The Department's Response to Specific Comments Regarding the Written Warning Letter and Written Ineligibility Notice

After considering the due process concerns expressed in comments regarding the Proposed Amendment, the Department is removing from the Final Amendment the written warning letter and Written Ineligibility Notice process that was associated with Prohibited Misconduct. The Department now is requiring the requisite factual determinations for Prohibited Misconduct defined in Section V(s)(2) to have been made in specified judicial proceedings.

Specifically, under the Final Amendment, a QPAM will become ineligible under Section I(g) as a result of Prohibited Misconduct as defined in Section VI(s)(2) if the QPAM, any Affiliates thereof (as defined in Section VI(d)), or any owner, direct or indirect, of a five (5) percent or more interest in the QPAM is found or determined in a final judgment, or court-approved settlement by a federal or state criminal or civil court in a proceeding brought by the Department, the Department of Treasury, the Internal Revenue Service, the Securities and Exchange Commission, the Department of Justice, the Federal Reserve Bank, the Office of the Comptroller of the Currency, the Federal Depository Insurance Corporation, the Commodities Futures Trading Commission, a state regulator, or state attorney general to have Participated In one or more of the following categories of conduct irrespective of whether the court specifically considers this exemption or its terms:

(A) engaging in a systematic pattern or practice of conduct that violates the conditions of this exemption in connection with otherwise non-exempt prohibited transactions;

(B) intentionally engaging in conduct violates the conditions of this exemption in connection with otherwise non-exempt prohibited transactions; or

(C) providing materially misleading information to the Department or the Department of Treasury, the Internal Revenue Service, the Securities and Exchange Commission, the Department of Justice, the Federal Reserve Bank, the Office of the Comptroller of the Currency, the Federal Depository Insurance Corporation, the Commodities Futures Trading Commission, a state regulator or a state attorney general in

connection with this exemption's conditions.

By removing the warning letter and Written Ineligibility Notice process and instead providing for ineligibility only after a Conviction, a court's final judgment, or a court-approved settlement, QPAMs, their Affiliates, and/or owners of a five (5) percent or more interest thereby are disqualified only after the culpable entity was afforded full due process in a legal proceeding overseen by a court. Section V(s)(2) is much narrower than the proposal inasmuch as it covers the types of misconduct specified in the proposal only when the misconduct is established in court proceedings brought by state or federal regulators. It ensures that the finding of misconduct was subject to the robust procedural protections provided by such proceedings.

Furthermore, by removing the warning letter and Written Ineligibility Notice process, and redefining Prohibited Misconduct in Section VI(s)(2) to be based on legal process that results in a court's final judgment or court-approved settlement, the QPAM will have been provided with sufficient notice that the conduct at issue is Prohibited Misconduct that causes ineligibility. This will give QPAMs sufficient time to apply for an individual exemption during the One-Year Transition Period.

More generally, the Department notes that the modification in the Final Amendment removes the Department from the process of making a factual determination that Prohibited Misconduct has occurred. Instead, for purposes of ineligibility due to Prohibited Misconduct in Section VI(s)(2), the court's final judgment (or approved settlement) must resolve the factual issue of whether any of these parties Participated In the conduct that constitutes Prohibited Misconduct as defined in Section VI(s)(2). Under the provision, the court does not have to make a specific legal finding regarding whether such conduct constitutes Prohibited Misconduct as defined in Section VI(s)(2) of the exemption, but rather whether, as a factual matter, the parties engaged in the specific conduct defined as Prohibited Misconduct in Section VI(s)(2). The Department has made changes to Section VI(s)(2) to make this distinction clear. The Department cautions QPAMs, their Affiliates, and owners of a five (5) percent or more interest that final judgments and court-approved settlements that include a finding that such conduct has occurred will cause immediate ineligibility under Section I(g). In these situations, a QPAM that intends to continue to rely on the QPAM exemption following the One-Year Transition Period that begins on the Ineligibility Date should submit an exemption application to the Department as soon as possible.

As mentioned above, some commenters expressed concern that the proposed definition of the phrase “participating in” was vague and overbroad. The Department disagrees with this concern. The parameters of the definition are similar to other definitions and conditions the Department has included in administrative exemptions it has issued since ERISA's enactment almost fifty years ago. Additionally, the commonly accepted definition of what it means to “participate in” conduct is well understood. The Proposed Amendment specifically provided additional guidance in the text of Proposed Section I(g)(3)(B) regarding what the Department meant by using the term “participating in.”

Therefore, the Department has not changed the definition of “Participating In” in the Final Amendment but has included in the definition the defined terms “Participate In,” “Participates In,” “Participated In,” and “Participation In” for clarity and accuracy and has moved the definition to the Definitions and General Rules in Section VI(t).

The preamble also specifically stated, “For purposes of proposed Section VI(s), the term `participating in' refers not only to actively participating in the Prohibited Misconduct but also to knowingly approving of the conduct or having knowledge of such conduct without taking appropriate and proactive steps to prevent such conduct from occurring, including reporting the conduct to appropriate compliance personnel.” 87 FR at 45209.

Due to this change, the Recordkeeping provision is redesignated as Section VI(u).

Costs Associated With Ineligibility Based on Participating In Prohibited Misconduct

Several commenters also noted that regardless of the reason for ineligibility, Plans would be exposed to substantial costs if a QPAM becomes ineligible. These commenters recommended that the Department exercise extreme caution before causing more QPAMs to face ineligibility. Some commenters also expressed concerns that the imposition of ineligibility is harmful to the Plans and their participants and beneficiaries and prevents appointing fiduciaries from exercising discretion to determine the best course of action for the Plan by placing constraints on the Plan's choice of QPAMs.

The Department notes that the Proposed Amendment and this Final Amendment appropriately place the burden associated with the costs of ineligibility on the QPAM. In response to the comment, the Department included the One-Year Transition Period in the Final Amendment to reduce the costs and burdens associated with the possibility of ineligibility, and to provide affected QPAMs with an opportunity to apply for individual exemptions with appropriate conditions. Therefore, the Department disagrees that the ineligibility provision unduly prevents fiduciaries from exercising their discretion.

In crafting the amendments, the Department was also mindful that the conduct that constitutes Prohibited Misconduct under the terms of the exemption is quite serious and that engaging in such conduct calls into question the QPAM's culture of compliance. The grant of an exemption involves a discretionary determination by the Department to permit parties to engage in conduct that is otherwise categorically prohibited by ERISA and the Code and it requires specific findings aimed at ensuring that the exemption is appropriately protective of the Plan and participant interests at stake in the regulation of tax-preferred retirement plans. While the prohibited transaction provisions constrain fiduciary choice, those constraints are expressly imposed by the statute for the protection of plan participants and beneficiaries. An exemption is not justified merely by pointing to a constraint expressly imposed by law and noting that it interferes with fiduciary discretion; all prohibited transaction provisions constrain fiduciary choice. The conditions of the QPAM Exemption are publicly and widely available, and the possibility that a QPAM could become ineligible if it participates in serious misconduct is clear. Moreover, if a fiduciary does not want to provide the additional protections included in this Final Amendment, it may pursue other options to receive prohibited transaction relief, such as using another relevant class prohibited transaction exemption or seeking an individual prohibited transaction exemption. Additionally, the sophistication of fiduciaries varies dramatically based on a variety of factors. The Department has an obligation to protect Plans and their participants and beneficiaries, even if an individual Plan fiduciary views such protections as unnecessary.

However, as noted above, the Department modified the scope of the Prohibited Misconduct provision in the Final Amendment; first, by removing foreign agreements that are equivalent to

NPAs and DPAs from the definition of Prohibited Misconduct in Section VI(s)(1) and second, by basing ineligibility as a result of Prohibited Misconduct defined in Section VI(s)(2) on a factual finding or determination by a court that the conduct described in Section VI(s)(2)(A) through (C) occurred, which should reduce the number of QPAMs that become ineligible. Moreover, the indemnification provision will ensure that Plans are not bearing the costs of ineligibility for QPAMs that become ineligible.

Both Categories of Prohibited Misconduct Only Will Apply Prospectively

Finally, several commenters requested clarification that the Prohibited Misconduct provisions of Section VI(s)(1) and (2) will result in ineligibility of a QPAM only on a prospective basis. In response, the Department confirms that ineligibility tied to Prohibited Misconduct related to executing NPAs and DPAs in Section VI(s)(1) of the Final Amendment will be applied only on a prospective basis that commences on the execution date of NPAs or DPAs with a U.S. federal or state prosecutor's office or regulatory agency that falls on or after June 17, 2024.

Similarly, under the Final Amendment, Section VI(s)(2) determinations of Prohibited Misconduct will apply prospectively as of the date of a court's final judgment or court-approved settlements that fall on or after June 17, 2024.

Violations of the Exemption and Misleading Statements

One commenter requested that the Department provide examples of Prohibited Misconduct for violations of the exemption or misleading statements so that firms are not caught off guard for Participating In Prohibited Misconduct. Another commenter requested clarification that inadvertent technical errors, such as failure to timely notify the Department of a legal name change, should not be deemed to be providing materially misleading information to the Department. As a general matter, the Department's position is that such inadvertent technical errors do not result in Prohibited Misconduct, particularly when such errors are corrected consistent with ERISA and Code standards, as applicable. Similar to Convictions, the exemption's Prohibited Misconduct provisions are aimed at protecting Plans and IRA owners from conduct that calls into question a QPAMs integrity and compliance culture and inadvertent technical errors, especially such errors that are promptly corrected, should not amount to such conduct.

With respect to mistakes in timely reporting a legal name change, the Department modified the reporting requirement in this Final Amendment to address such issues, as discussed above in connection with the reporting requirement. As discussed in detail above, the modifications in the Final Amendment to the definition of Prohibited Misconduct in Section V(s)(2) whereby requisite factual determinations are made through a judicial proceeding will put a QPAM and its Affiliates on notice regarding conduct that is defined as Prohibited Misconduct in Section V(s)(2)(A) through (C).

Section I(h)—Timing of Ineligibility

The Proposed Amendment did not include any direct changes to the ten-year ineligibility period under current Section I(g).

The Department added a new provision, Section I(h), that specified the timing of ineligibility. In the Proposed Amendment, for Prohibited Misconduct, the ineligibility period would have begun as of the date of a Written Ineligibility Notice, whereas, for a Criminal Conviction, it would have begun on the date the trial court enters its judgment.

The Proposed Amendment clearly stated that for a foreign conviction, ineligibility would begin on “the date of the judgment of any court in a foreign jurisdiction that is the equivalent of a U.S. federal or state trial court. . . .” This refers to a trial court of original or primary jurisdiction, such as a court of first instance.

The period of ineligibility would have begun on the conviction date, regardless of whether the judgment is appealed or the appeal has suspensive effect. Only upon a subsequent final judgment reversing the conviction would a person no longer be considered “convicted” for purposes of this exemption.

The One-Year Transition Period, however, has an impact on how a QPAM approaches the first year after experiencing an ineligibility trigger.

For convictions that also result in imprisonment of a person, the end of the ten-year period is counted from the date of release from imprisonment.

This is generally considered to be the lowest level court in a particular jurisdiction that has the power to render a judgment of conviction.

This Final Amendment retains the ineligibility start date for a Criminal Conviction as the date the trial court enters its judgment. However, because the Final Amendment does not include the proposed warning and Written Ineligibility Notice process, the timing for Prohibited Misconduct in Section I(h)(2) of the Final Amendment has been modified. In the Final Amendment, the ineligibility period for Participating In Prohibited Misconduct begins on the date, on or after June 17, 2024 that the QPAM, any Affiliate thereof (as defined in Section VI(d)), or any owner, direct or indirect, of a five (5) percent or more interest in the QPAM:

(A) executes an NPA or DPA described in Section VI(s)(1)); or

(B) is found or determined in a final judgment in certain federal or state court proceedings (regardless of whether the judgment is appealed) or a court-approved settlement to have Participated In the conduct that meets the definition of Prohibited Misconduct in Section VI(s)(2).

In the Proposed Amendment the Department specifically sought comments on the timing of ineligibility. One commenter suggested that the Winding-Down (Transition) Period should be restructured into two distinct periods: the first to allow a QPAM to apply for an individual exemption, and the second period to prevent disruption and assist Plans in the event a transition is needed to a new QPAM. The Department believes it has functionally provided this structure in the Final Amendment. The One-Year Transition Period provides time for transition that was not previously included in the exemption. As noted earlier in this preamble, an ineligible QPAM should initiate an individual exemption request as soon as it reasonably believes its Plan clients likely will be harmed without additional prohibited transaction relief after the Transition Period ends. The Department notes that it will continue to consider individual exemption requests for ineligible QPAMs to be able to continue providing services, as well as requests for additional transitional relief to allow their client Plans to search for and hire a new asset manager.

Proposed Section I(i)

—Warning and Opportunity to be Heard in Connection With Prohibited Misconduct—Written Ineligibility Notice

Certain sections of the Final Amendment have been renumbered and Section I(i) in the Final Amendment has been redesignated as the

One-Year Transition Period Due to Ineligibility.

The Department proposed an additional process that would be tied to a determination that a QPAM had participated in Prohibited Misconduct. In the proposal, before issuing a Written Ineligibility Notice in connection with Prohibited Misconduct to the QPAM, the Department indicated it would have issued a written warning, identified the Prohibited Misconduct, and provided 20

days for the QPAM to respond. The Proposed Amendment also indicated that if the QPAM failed to respond to the written warning within 20 days, the Department would have issued the Written Ineligibility Notice. However, if the QPAM responded within the 20-day timeframe, the Department would have provided the QPAM with the opportunity to be heard either in person (including by phone or a videoconference) or in writing, or a combination of both, before the Department decided whether it would have issued the Written Ineligibility Notice.

As discussed under the

Specific Comments Regarding Prohibited Misconduct under the Written Ineligibility Notice Process

heading above, some commenters questioned the sufficiency of the process leading to a warning letter and Written Ineligibility Notice, citing due process concerns and specifically, the lack of an adversarial process adjudicated by an independent third party (such as review by an administrative law judge or federal court). Relatedly, another commenter indicated that these provisions within the Proposed Amendment would have provided the Department with too much discretion to cause a QPAM's ineligibility. One commenter specifically noted the additional due process protections provided through the court system for Criminal Convictions are not present for a QPAM that Participates In Prohibited Misconduct. Another commenter noted that the lack of an appeals process as part of the proposed Written Ineligibility Notice process could provide the Department with unchecked power.

As more fully discussed above under the

Specific Comments Regarding Prohibited Misconduct under the Written Ineligibility Notice Process

heading, in response to the process concerns expressed by commenters, the Department has removed the proposed warning letter and Written Ineligibility Notice process and modified the definition of Prohibited Misconduct under Section VI(s). Removing the proposed warning letter and Written Ineligibility Notice process from this Final Amendment, and instead providing that a QPAM's ineligibility under Section VI(s)(2) only occurs after a Conviction, a court's final judgment, or a court-approved settlement, will afford QPAMs, their Affiliates, and owners of a five (5) percent or more interest with substantial due process in a legal proceeding that is overseen by a court, not the Department. Also, this Final Amendment provides that ineligibility occurs under Section VI(s)(1) when a QPAM, any Affiliate thereof (as defined in Section VI(d)), or any owner, direct or indirect, of a five (5) percent or more interest in the QPAM executes an NPA or DPA with a U.S. federal or state prosecutor's office or regulatory agency, which generally will afford QPAMs and their Affiliate(s) and owner(s) with the due process protections that are associated with related criminal investigations.

Section I(i)—Mandatory One-Year Transition Period

Certain sections of the Final Amendment have been renumbered and Proposed Section I(j) is now Section I(i) in the Final Amendment. As part of the Proposed Amendment, the Department included a mandatory one-year Winding-Down Period that would have begun on the Ineligibility Date. The Winding-Down Period was designed to provide Plans with the ability to wind down their relationships with a QPAM immediately after the QPAM becomes ineligible to rely on the exemption. Satisfaction of the conditions of the Winding-Down Period would affect the availability of relief for all transactions covered by this exemption. As proposed, the Department intended to include relief for past transactions and any transaction continued during a one-year Winding-Down Period.

One commenter indicated that the term “winding-down” was pejorative and should be replaced with more neutral nomenclature such as a term indicating it is a transition period. The Department did not intend for the term to be pejorative. Therefore, the Department has substituted the word “Transition” for “Winding-Down” to avoid the possible unintended implication that the Department intended the term “Winding-Down” to mean that the QPAM was necessarily going out of business as a QPAM on the Ineligibility Date. The Department stresses, however, that future relief based on an individual exemption application is not guaranteed, and the new term should not be read to suggest otherwise.

As noted above, the QPAM is free to apply for an individual exemption that would enable it to continue its eligibility to act as a QPAM and engage in transactions that would otherwise be prohibited after the expiration of the Transition Period, although there is no guarantee that the Department will grant such an exemption. Prohibited transaction relief during the Transition period would be subject to compliance with all conditions of the exemption except Section I(g)(3), which is renumbered Section I(g)(1) in this Final Amendment.

The Proposed Amendment provided that once the Transition Period begins, relief under the QPAM Exemption would only be available for transactions undertaken for the QPAM's existing clients—

i.e.,

the QPAM's client Plans that had a pre-existing Written Management Agreement (as required under Section VI(a)) on the Ineligibility Date for transactions entered into before the Ineligibility Date. Thus, after the Ineligibility Date, the QPAM would be prohibited from engaging in new transactions in reliance on the QPAM Exemption for existing client Plans. Additionally, if the QPAM obtained new client Plans during the Transition Period, the Proposed Amendment would not provide relief under the QPAM Exemption for any transactions the QPAM entered into on their behalf, unless such relief was granted in a separate individual exemption.

The Department designed the proposed Transition Period to mitigate the cost and disruption to Plans, their participants and beneficiaries, and IRA owners that can occur when a QPAM becomes ineligible for relief. The proposed One-Year Transition Period was intended to give a QPAM's client Plans time to decide whether to hire an alternative discretionary asset manager that is eligible to operate as a QPAM or continue their relationship with the ineligible QPAM. The Department believed that a One-Year Transition Period would be necessary to ensure that Plans have sufficient time to engage in a search for an alternative QPAM or discretionary asset manager if they decide it is in the Plan's best interest to do so.

The proposed Transition Period conditions required the QPAM to provide notice of its ineligibility to its existing client Plans and the Department (via

QPAM@dol.gov

) within 30 days after the Ineligibility Date. The proposed notice was required to: (1) include an objective description of the facts and circumstances upon which the Criminal Conviction or Written Ineligibility Notice

is based; (2) be written with sufficient detail, consistent with the QPAM's duties of prudence and undivided loyalty under ERISA, to fully inform a Plan fiduciary of the nature and severity of the criminal conduct or Prohibited Misconduct; and (3) be sufficient enough to enable such Plan fiduciary to satisfy its fiduciary duties of

prudence and loyalty under Title I of ERISA when hiring, monitoring, evaluating, and retaining the QPAM.

The Written Ineligibility Notice has been removed from this Final Amendment therefore, the term “Written Ineligibility Notice” in Section I(i) has been replaced with the term “Prohibited Misconduct” in the Final Exemption.

The Proposed Amendment required that within 30 days after the Ineligibility Date, the QPAM would have to notify its client Plans that, as required by the proposed WMA provisions, the QPAM will not restrict the client's ability to terminate or withdraw from its arrangement with the QPAM. Thus, the QPAM would not be permitted to impose any fees, penalties, or charges on client Plans in connection with the process of terminating or withdrawing from a QPAM-managed Investment Fund except for reasonable fees, appropriately disclosed in advance, that are specifically designed to prevent generally recognized abusive investment practices or specifically designed to ensure equitable treatment of all investors in a pooled fund in the event such withdrawal or termination may have adverse consequences for all other investors. If such fees, penalties, or charges occur, they must be applied consistently and in a like manner to all such investors.

The Proposed Amendment also required the QPAM to indemnify, hold harmless, and promptly restore losses to each client Plan for any damages resulting from a violation of applicable laws, a breach of contract, or any claim arising out the QPAM's ineligibility. For purposes of this provision, the Proposed Amendment indicated that actual losses specifically include losses and costs arising from unwinding transactions with third parties and from transitioning Plan assets to an alternative discretionary asset manager.

Additionally, to ensure Plans were protected from bad actors, the Proposed Amendment required the QPAM not to employ or knowingly engage any individual that Participated In conduct that is the subject of a Criminal Conviction or Prohibited Misconduct. For Criminal Convictions, this would apply regardless of whether the individual is separately convicted in connection with the criminal conduct. The Proposed Amendment indicated that the QPAM must adhere to this requirement no later than the Ineligibility Date.

Finally, the Proposed Amendment prohibited the QPAM from relying on the relief provided in the QPAM Exemption after the One-Year Transition Period unless the Department granted the QPAM an individual exemption allowing it to continue relying upon the exemption. The Proposed Amendment provided that the Transition Period would not be suspended while an individual exemption application is pending with the Department.

The Department requested comments on the Transition Period, including whether one year is the appropriate length of time and whether there are additional protections for Plan participants and beneficiaries and IRA owners that the Department should consider.

Many commenters argued that the proposed prohibition on the QPAM engaging in any new transactions during the Transition Period, even for existing clients, should be removed. These commenters indicated that QPAMs who become ineligible should be permitted to make new investments during the Transition Period on behalf of their client Plans that conform to investment guidelines approved by a Plan fiduciary during the Transition Period. In support of this position, commenters indicated that when QPAMs have been engaged to carry out an investment strategy that requires them to continually make new investments, the proposed prohibition on engaging in new transactions for existing clients could be particularly detrimental. For instance, there could be a series of transactions that require ongoing adjustments (such as in the case of swaps and other derivatives), and an inability to adjust these transactions could detrimentally impact the QPAM's client Plans and counterparties alike.

After considering these comments, the Department agrees that to avoid the potential harm that QPAMs' client Plans could suffer if their investments are effectively frozen, it is appropriate to remove the prohibition on QPAMs entering into new transactions for existing client Plans during the Transition Period. The Department reminds QPAMs that they must meet their fiduciary obligations of prudence and loyalty set forth in ERISA section 404 when making investment decisions on behalf of their ERISA-covered Plan clients and IRA clients (to the extent that ERISA section 404 is applicable) during the Transition Period.

One commenter suggested that the Department included the Transition Period provisions in the Proposed Amendment because it clearly assumed that QPAMs' client Plans would want to fire their asset manager. The Department did not intend to convey this view in the Proposed Amendment. The Department included this provision in the Proposed Amendment to provide an ineligible QPAM's client Plans with an off-ramp if they choose to terminate their relationship with the asset manager. The Department's sole reason for including the Transition Period provisions is to protect the affected Plans. Thus, for example, if a Plan chooses to retain its relationship with a QPAM that becomes ineligible, it may do so, but the Department's intention is to prevent Plans from being locked into a contractual arrangement with an ineligible QPAM.

Multiple commenters indicated that the process for replacing a larger Plan's investment manager typically takes more than one year and suggested alternative timeframes for the Transition Period. For example, commenters suggested the Department extend the Transition Period to at least 18 months or two years, and another commenter offered the alternative of having the Transition Period last at least until after the Department makes a final determination regarding whether to grant or deny the QPAM's individual exemption application.

After considering these comments, the Department decided not to change the timeframe for the Transition Period in the Final Amendment. The Department recognizes that in some cases a longer Transition Period could be necessary but determined the best way to address this circumstance is through the individual exemption process on a case-by-case basis. Performing the necessary analysis during the individual exemption process will ensure the Department has sufficient information to appropriately consider whether additional protections are necessary for impacted Plans based on the QPAM's particular facts and circumstances. The Department does not believe it is appropriate to extend the Transition Period until a formal decision on an individual exemption has been made as the Department processes individual exemption applications on a case-by-case basis and the timeframes for each case vary. Therefore, the duration of the Transition Period would be uncertain.

One commenter noted that the Department's participant disclosure regulation requires any change to a defined contributions plan's designated investment alternatives to be disclosed to participants at least 30 days (but not more than 90 days) in advance. The commenter indicated that it appeared that the Department has not considered the practical limitations of such notices on the duration of the Transition Period. The one-year duration of the Transition Period, however, provides more than sufficient time to accommodate the requirements of the participant disclosure regulation. If additional relief is needed beyond the one-year period, the QPAM may request a supplemental individual exemption to ensure that such a change is made accordingly.

One commenter asserted that the Proposed Amendment did not clearly indicate the QPAM's obligations to non-ERISA investors in a pooled fund or how these investors would be treated. Another commenter suggested that the Department should focus on the issue of pooled funds, where QPAMs will need to balance the interests of Plans leaving the fund with those Plans remaining in the fund. The Proposed Amendment and this Final Amendment treat non-ERISA and Plan investors in a similar manner to the way the Department has addressed this issue in individual exemptions related to Section I(g) ineligibility. Specifically, the provision prohibiting a QPAM from imposing fees, penalties, or charges in the Proposed Amendment includes an explicit exception for “reasonable fees, appropriately disclosed in advance, that are specifically designed to: (a) prevent generally recognized abusive investment practices or (b) ensure equitable treatment of all investors in a pooled fund in the event such withdrawal or termination may have adverse consequences for all other investors, provided that such fees are applied consistently and in a like manner to all such investors.” The Department has retained this exception in this Final Amendment, which addresses the commenter's concern.

Some commenters indicated that Plans should be given more control over the decision to continue relying on the QPAMs. The commenters suggested that the Department give Plans the ability to decide whether to terminate or withdraw from their relationship with a QPAM and the flexibility to determine a timeline for withdrawal. One commenter asserted that Plans choose asset managers based on their reputation and expertise in specific areas of asset management. The commenter added that the Plan is in the best position to determine whether it is in the Plan's best interests to terminate or withdraw from their relationship with the QPAM. As discussed above, however, ultimately the decision on whether to grant relief from ERISA and the Code's prohibited transaction provisions rests with the Department. In the Department's view, the individual exemption process provides a full, fair, and open process for the Department to determine whether a QPAM should be permitted to engage in otherwise prohibited transactions post-conviction, and if so, the conditions which should be placed on such relief. To the extent QPAMs obtain such individual exemptions, Plans remain free to rely upon them to engage in transactions that would otherwise be prohibited if the QPAMs meet the conditions that are specified in the exemptions.

Finally, one commenter noted that to fully effectuate the intent of the Transition Period provisions for stable value investment contracts, the length of the period should be based on the duration of the underlying investment portfolio or as otherwise provided under the terms of the contract for an extended or amortized termination. The Department declines to give preferential treatment to QPAMs responsible for such investment contracts in this manner. Here too, the individual exemption process is best suited to address any specific issues or concerns based on the nature of the QPAM's investments or investment practices.

Finally, the Department made a few additional ministerial changes to the Transition Period provisions in the Final Amendment. First, the Department capitalized the term “Transition Period.”

Second, the Department modified the first sentence of the Transition Period provision to clarify its focus on client Plans, by replacing the phrase “engage in” with “provide,” and by dividing the first sentence into two sentences to improve readability. Third, the Department replaced the Proposed Amendment's reference to subsection I(g)(2) (regarding the WMA) with a reference to subsection I(i) because the Department moved the WMA requirements to this subsection. Finally, as noted above, since the Written Ineligibility Notice provisions have been removed from the Final Amendment, the term “Written Ineligibility Notice” as used in this Section in the Proposed Amendment, now has been replaced with the term “Prohibited Misconduct.”

The Department capitalized the term in other Sections of the Final Amendment as well.

Section I(j)—Requesting an Individual Exemption

The Proposed Amendment included a new Section I(k),

which provided that a QPAM that is ineligible or anticipates becoming ineligible may apply for supplemental individual exemption relief. The Proposed Amendment's Section I(k) instructed an applicant, as part of such a request, to review the Department's most recently granted individual exemptions involving Section I(g) ineligibility with the expectation that similar conditions will be required if an exemption is proposed and granted. Proposed Section I(k) also indicated that if an applicant wished to exclude any term or condition from its exemption, the applicant would need to accompany such request with a detailed explanation of the reason such change is necessary and in the interest of and protective of the Plan, its participants and beneficiaries, and IRA owners. Proposed Section I(k) indicated that the Department would review such requests consistent with the requirements of ERISA section 408(a) and Code section 4975(c)(2).

Section I(k) of the Proposed Amendment has been renumbered in the Final Amendment as Section I(j).

To facilitate the processing of an individual exemption application, proposed Section I(k) also instructed applicants to provide detailed information in their applications quantifying the specific cost or harms in dollar amounts, if any, that Plans would suffer if a QPAM could not rely on the exemption after the Transition Period, including the specific dollar amounts of investment losses resulting from foregone investment opportunities and any evidence supporting the proposition that investment opportunities would only be available to Plans on less advantageous terms.

Proposed Section I(k) also indicated that an applicant should not construe the Department's acceptance of an individual exemption application as a guarantee that the Department will grant an individual exemption. Therefore, a QPAM that submits an individual exemption application must ensure that it manages Plan assets prudently and loyally during the Transition Period with the understanding that final approval of an individual exemption is not guaranteed.

The Proposed Amendment reinforced that for the Department to make the necessary statutory findings under ERISA section 408(a) and Code section 4975(c)(2), applicants also should anticipate that the Department may condition individual exemptive relief on a certification by a senior executive officer of the QPAM (or comparable person) that: (1) all of the conditions of the Transition Period were met, and (2) an independent audit reviewing the QPAM's compliance with the conditions of the Transition Period has been completed.

QPAMs affected by a conviction also should not wait until late in the Transition Period to apply for an individual exemption.

The Department additionally clarifies that the certification of the independent audit would come at some point after an individual exemption is granted and the One-Year Transition Period has ended.

The Department received a few comments on this new provision. One commenter noted that the conditions that have been incorporated into the most recent individual exemption that

apply to a particular QPAM may not be appropriately tailored to a subsequent application and fact pattern. Another commenter indicated that the Department is increasingly adopting onerous conditions for granting individual exemptions and seems even less likely to grant them. Yet another commenter opined that an ineligible QPAM may be unlikely to receive an individual exemption that is usable.

Considering the serious corporate criminal misconduct the Department has seen in Section I(g) individual exemption applications and audits submitted to the Department as required by granted individual exemptions, the Department remains convinced that the proper starting point for individual exemption conditions should be the Department's most recently-issued individual exemptions. This procedural standpoint is neither new nor undisclosed. For decades, the Department has generally crafted proposed exemptions for similarly situated applicants that contain similar conditions, subject to the Department's periodic reevaluation of the exemption conditions to ensure that they remain appropriately protective for the Department to make the findings required by ERISA section 408(a) and Code section 4975(c)(2).

The Department will consider the individual facts and circumstances of each application, but Section I(j) (formerly section I(k) in the Proposed Amendment) is intended to clearly provide the appropriate starting point for applicants that are preparing an exemption application in connection with Section I(g) ineligibility. Regarding the commenter's reference to the Department's onerous conditions, over the past decade, the Department's experience indicates that QPAM ineligibility under Section I(g) has occurred in most cases due to serious corporate criminal misconduct. The Department believes that it has tailored the conditions of the most recent Section I(g) individual exemptions to appropriately address the potential for significant financial harm to Plans, while providing workable relief. Moreover, if a QPAM is concerned about the usability of a Section I(g) individual exemption, then the QPAM, its Affiliates, and owners of a five (5) percent or more interest may structure their conduct to avoid engaging in transactions that are otherwise legally prohibited or rely on exemptions other than the QPAM Exemption to avoid the consequences that result from Section I(g) ineligibility.

The Department also notes that applicants may request more limited relief than the QPAM Exemption otherwise provides. For example, a QPAM may only need prohibited transaction relief for a particular limited category of transactions, such as an on-going lease that was entered into on behalf of an Investment Fund which is expected to continue past the One-Year Transition Period. In such circumstances, due to the limited nature of the transaction(s) for which relief is sought, applicants should discuss the terms and conditions of prior individual exemptions involving Section I(g) in connection with a request for more limited prohibited transaction relief. The applicant also should include a detailed explanation in its application regarding how Plans will be otherwise protected and why the transaction cannot be unwound before the end of the Transition Period without harm or losses to such Plans.

Finally, the Department reminds any applicant anticipating that it will need relief beyond the end of the One-Year Transition Period to apply to the Department for an individual exemption as soon as practicable. As a fiduciary, the QPAM has obligations with respect to Plans beyond those required by the QPAM Exemption and should approach the Department at the earliest point it appears a conviction will occur, such as when a plea agreement has been entered into—even if the conviction date has not yet been set—to ensure that appropriate steps can be taken by or on behalf of its client Plans ultimately impacted by the QPAM's loss of exemptive relief.

Section I(c)—Involvement in Investment Decisions by a Party in Interest

The Proposed Amendment included modifications to Section I(c) of the QPAM exemption that are consistent with the Department's original intent when granting the exemption. In the 1984 grant notice, the Department stated that an essential premise of the exemption is that broad prohibited transaction relief can be afforded only if the negotiations leading to, and the commitments and investments of, plan assets are the sole responsibility of an independent investment manager. The Department reasoned in the 1984 grant notice that the potential for decision making with regard to plan assets that would inure to the benefit of a party in interest would be increased if exemptive relief were provide in circumstances where the QPAM has less than ultimate discretion over acquisitions for an investment fund that it manages.

49 FR at 9497.

The proposed new language in Section I(c) was intended to make clear that a QPAM must not permit a Party in Interest to make decisions regarding Plan investments under the QPAM's control. The Proposed Amendment included in the opening of Section I(c) a statement providing that the terms of the transaction, “commitments, investment of fund assets, and any corresponding negotiations on behalf of the Investment Fund are the sole responsibility of the QPAM. . . .”

The Department also proposed to add language at the end of Section I(c) stating that the prohibited transaction relief in the exemption applies “only in connection with an Investment Fund that is established primarily for investment purposes” and that “[n]o relief is provided under this exemption for any transaction that has been planned, negotiated, or initiated by a Party in Interest, in whole or in part, and presented to a QPAM for approval because the QPAM would not have sole responsibility with respect to the transaction as required by this section I(c).”

For example, as stated in 1982 proposal for the QPAM Exemption, a plan sponsor that negotiates a transaction and then presents it to a QPAM for approval would not qualify for the relief in the class exemption. The 1982 proposal further states that the relief in the proposed exemption would be available even though the transfer of assets by a plan to a QPAM is subject to general investment guidelines, so long as there is no arrangement, direct or indirect, for the QPAM to negotiate, or engage in, any specific transaction or to benefit any specific person.

87 FR at 45227.

Id.

47 FR at 56947.

The Department received numerous comments regarding the proposed changes to the wording of Section I(c). Some of these commenters indicated their understanding of the Department's view that a QPAM should not act as a rubber stamp to approve transactions designed by the Party in Interest who appointed the QPAM. Similarly, commenters indicated they shared the goal of preventing the QPAM Exemption from being abused,

i.e.,

a QPAM being used to “sanitize” a transaction where there is an underlying goal to avoid the restrictions of the prohibited transaction rules. One commenter also indicated that it understood the Department has long maintained that QPAMs should not simply act as “mere independent approvers” but should be intimately involved in the negotiation and approval of the transaction. The

commenter believed that this interpretation is widespread in the market and needs no clarification. Another commenter also indicated that the original QPAM Exemption was clear and understood by practitioners—a named fiduciary could not appoint a QPAM to approve a pre-negotiated transaction nor could the appointing fiduciary retain a veto or approval right over any transaction.

Commenters also raised a variety of other general issues and concerns with the proposed changes to Section I(c). One commenter noted that the Department has not identified any evidence of harm necessitating changes to the language of Section I(c). Another commenter suggested that any proposal to make changes to the way various Plan fiduciaries interact with QPAMs should be the subject of a separate, carefully crafted proposal with stakeholder input and regulatory cost analysis. A commenter also asked whether the Department's clarifications were meant to refer to Plan sponsors instead of a Party in Interest with no ability to meaningfully influence a transaction.

The Department has an ongoing interest and responsibility under ERISA section 408(a) and Code section 4975(c)(2) to revisit and update exemptions on an ongoing basis to ensure that that they maintain their protective purpose. Although Section I(a) of the exemption directly addresses Plan sponsors, Section I(c) provides additional protections that also apply to the Plan sponsor. These conditions are intended to work together, not separately, to prevent a Plan sponsor from attempting to influence a transaction. To the extent QPAMs are already fully complying with the Department's expectation of independent judgment, and not acting as mere rubber stamps, appropriate clarifying language should impose no additional burden. It is essential to the achievement of the exemption's aims, however, that the Department's expectations be clear in this regard.

Modifications to Section I(c) are appropriate to ensure the Department's intent is understood by practitioners, QPAMs, and their client Plans. It is also important for QPAMs to be mindful of the requirements of the exemption rather than simply deriving the benefits of calling themselves QPAMs while ignoring the QPAM Exemption's core requirements and protective intent. Moreover, the Department notes that Section I(c) requires the asset manager to act independently, as a general matter, from Plan sponsors and Parties in Interest. Without an overarching compliance-focused approach to its asset management arrangement and Section I(c), the protective purpose of ensuring the QPAM's independence is undermined.

Commenters raised a variety of other topics, such as: (1) the amount of permitted involvement by a Party in Interest/Plan sponsor in investment decisions, including voting proxies; (2) arrangements that involve multiple investment managers; (3) transactions initiated or negotiated by a Party in Interest; (4) sub-advisers and collective investment trusts; (5) pension risk transfers; (6) an Investment Fund established primarily for investment purposes; (7) eliminating all the changes in the Proposed Amendment; and (8) alternatives to the changes in the Proposed Amendment. The Department revised the wording of Section I(c) in this Final Amendment in response to some of these comments, as discussed below. However, the Department reemphasizes that the role of the QPAM under the terms of the exemption is not to act as a mere independent approver of transactions. Rather, the QPAM must have and exercise sole discretion over the commitments and investments of Plan assets and the related negotiations on behalf of the Plan with respect to an Investment Fund that is established primarily for investment purposes for the relief provided under the exemption to apply.

Involvement in Investment Decisions

One commenter opined that Plan sponsors and Plan fiduciaries should be able to have meaningful involvement in the process of negotiating an investment contract's investment guidelines without affecting the ability of the investment manager to rely on the QPAM Exemption. Another commenter requested that the Department clarify that routine monitoring meetings and inquiries by Plan fiduciaries with respect to a manager's trading strategies do not constitute “planning.” One commenter also requested clarification that nothing in the Proposed Amendment would prevent the trustees of multiemployer plans from retaining or delegating the right to vote proxies held by the QPAM, or to exercise other similar shareholder rights, even if such proxies or rights relate to investments in a Party in Interest.

The Department notes that routine monitoring of meetings and inquiries by Plan fiduciaries would not be considered “planning” for purposes of Section I(c). This type of involvement is consistent with a fiduciary's obligations under ERISA section 404 and the Department's prior guidance regarding investment guidelines that may be provided to the QPAM. For clarity, the Department is changing the word “because” to “to the extent” in the proposed sentence:

No relief is provided under this exemption for any transaction that has been planned, negotiated, or initiated by a Party in Interest, in whole or in part, and presented to a QPAM for approval because the QPAM would not have sole responsibility with respect to the transaction as required by this Section I(c).

That sentence now reads:

No relief is provided under this exemption for any transaction that has been planned, negotiated, or initiated by a Party in Interest, in whole or in part, and presented to a QPAM for approval to the extent the QPAM would not have sole responsibility with respect to the transaction as required by this Section I(c).

With respect to proxies and exercising other shareholder rights, the Department notes that the QPAM Exemption was never intended to cover transactions in which a Party in Interest is making the decisions pertaining to specific transactions. The possibility that Plan fiduciaries have been relying upon the QPAM Exemption for such transactions highlights one of the reasons the Department proposed changes to Section I(c). The Department would generally consider reliance on the QPAM Exemption in these cases to be an abuse or misuse of the QPAM Exemption.

Importantly, as the Department stated in the preamble of the original granted exemption in 1984, the Department “does not interpret Section I(c) as exempting a subsidiary transaction unless such transaction is itself subject to relief under the class exemption and the applicable conditions are met.”

Any parties that require more detailed guidance on the applicability of the QPAM Exemption to certain transactions may submit an advisory opinion request to the Department.

49 FR at 9497.

Multiple Investment Managers

Commenters indicated that Plan sponsors often hire multiple investment managers to execute the Plan's overall investment strategy with each manager being given certain assets to manage in a particular manner. And since only the Plan sponsor knows the overall strategy, it is natural and beneficial for the Plan sponsor to be able to have ongoing dialogues with their managers without those dialogues disqualifying the manager from serving as a QPAM.

The Department notes that the proposed changes to Section I(c) were not intended to prevent Plan sponsors

from having ongoing dialogue with an investment manager. The Department's intent and additional clarification regarding the proposed changes re-emphasize that a Plan sponsor can provide investment guidelines to a QPAM. The natural corollary would be for Plan sponsors to revisit those investment guidelines at appropriate intervals. One of the Department's key points with the proposed changes to Section I(c) is that any direction from a Plan sponsor or other Party in Interest for a QPAM to engage in a particular transaction would be contrary to the intent of Section I(c). A Plan sponsor that utilizes multiple QPAMs, however, may interact with each manager as part of a larger overall investment strategy as long as the QPAMs retain the sole authority to engage in transactions in accordance with the strategy, and there is no direct or indirect arrangement for any QPAM to negotiate, or engage in, any specific transaction or to benefit any specific person.

Initiating, Planning, and Negotiation Transactions

Many commenters raised concerns regarding the use of the word “initiate” in the Department's proposed changes to Section I(c). Some commenters expressed concern because Investment Fund transactions in derivatives or other investment products that are developed and pitched to a QPAM by a financial institution acting as a service provider to the QPAM—a common scenario in the derivatives market—could be interpreted as initiated by a Party in Interest. Commenters also indicated that even if a transaction is not of a type that is customarily negotiated, the counterparty Party in Interest would still be involved. A few commenters opined that the reference to a transaction being “negotiated” by the Party in Interest and then “presented to a QPAM for approval” is sufficient to achieve the Department's objective. Further, a commenter indicated that the proposed amendments mischaracterize the actual application of a QPAM's discretionary authority. This commenter indicated that if not eliminated, the terms “planned,” “negotiated,” and “initiated” should be clarified to address the Department's concerns more directly. For example, if the Department is concerned about the practice of hiring a QPAM for the sole purpose of approving a particular transaction already contemplated and/or negotiated by another Plan fiduciary, the Department should craft language more narrowly aimed at preventing this situation.

The Department notes that whether a particular sales pitch or an offer of an investment product from a Party in Interest would run afoul of the intent of Section I(c), including the proposed changes, depends on the associated facts and circumstances. It would be inappropriate for the Department to embed these facts and circumstances into an exemption condition, because the exemption would become unduly complex and unworkable. As a general matter in this regard, QPAMs should interpret the protective nature of Section I(c) expansively and avoid responding to any sales pitch or offer with respect to a proposed transaction that would call into question whether the QPAM is ultimately solely responsible for planning, negotiating, and initiating the transaction.

In order to further clarify this concept, the Department has added the following sentences to Section I(c): “In exercising its authority, the QPAM must ensure that any transaction, commitment, or investment of fund assets for which it is responsible are based on its own independent exercise of fiduciary judgment and free from any bias in favor of the interests of the Plan sponsor or other parties in interest. The QPAM may not be appointed or relied upon to uncritically approve transactions, commitments, or investments negotiated, proposed, or approved by the Plan sponsor, or other parties in interest.”

Sub-Advisers and Collective Investment Trusts

A few commenters indicated that the Department's proposed language could be interpreted to restrict the use of sub-advisers by a QPAM, including in the context of collective investment trusts (CITs). Commenters indicated that utilizing sub-advisers to make recommendations for certain investments in which they specialize or possess expertise is important because a QPAM may otherwise be compelled to do its own research before investing Plan assets, even when the QPAM can more readily rely upon a sub-adviser with specialized expertise regarding certain types of assets. Commenters noted that QPAMs regularly delegate certain investment responsibilities to a sub-adviser but retain authority to approve transactions. With respect to CITs, commenters indicated that in order to comply with securities and banking laws, the sponsoring trust company generally retains ultimate investment authority, but typically appoints a sub-adviser who invests the CIT's assets on a day-to-day basis. Commenters felt the proposed revision to Section I(c) would present a structural conundrum for CITs and their providers given the standards imposed by the federal securities laws and OCC regulations. According to commenters, the proposed language requires that the QPAM have the “sole authority” over the transaction. Commenters indicated that neither the sponsoring trust company nor sub-adviser have the sole authority, although both are fiduciaries under ERISA and may need to rely on the QPAM Exemption.

The Department expects that a QPAM may rely on the specific expertise of a prudently selected and monitored entity to assist the QPAM in prudently managing Plan assets. Therefore, a QPAM's delegation of certain investment-related responsibilities to a sub-adviser does not, by itself, violate Section I(c), as long as the QPAM retains sole authority with respect to planning, negotiating, and initiating the transactions covered by the QPAM Exemption. A QPAM should not “more readily” rely on a sub-adviser that has specialized expertise, in order to engage in a particular transaction, if the reliance means that the QPAM would not have sole authority with respect to planning, negotiating, and initiating the transaction.

Furthermore, parties that participate in arrangements that do not clearly identify which party has the ultimate responsibility and authority to engage in a particular transaction should not assume that the transaction is permitted by the QPAM Exemption. The Department recommends that affected parties involved in such transactions seek an advisory opinion or request other guidance from the Department regarding whether the QPAM Exemption is available for such transactions.

Pension Risk Transfers

One commenter suggested the proposed changes to Section I(c) could render the QPAM Exemption unavailable for pension risk transfers where a Plan purchases an annuity from an insurance company in connection with the termination of the Plan or to annuitize a subset of the Plan's participant population. The commenter did not provide specific details as to what aspects of proposed Section I(c) would potentially create problems for this type of transaction, however. The QPAM Exemption is designed to accommodate a broad range of prudent investment transactions, and the Department does not believe that the exemption poses any special impediment to such transactions as they may relate to pension risk transfers. If

the commenter's concerns remain after it considers the Department's modifications to Section I(c) in the Final Amendment, the affected parties may seek an advisory opinion or request other guidance from the Department regarding whether the QPAM Exemption is available for such transactions.

Fund Established Primarily for Investment Purposes

In connection with the Department's proposed language that the Investment Fund must be established primarily for investment purposes, one commenter requested the Department clarify that this includes a fund that is established for mixed-use purposes that contains an investment component. The commenter indicated the fund may have certain non-investment purposes, such as the payment of benefits and Plan expenses. Another commenter indicated that the QPAM Exemption long has been used by Plans to hire managers, as well as trustees, custodians, and recordkeepers, regardless of the type of Plan (pension, savings, or welfare).

The Department notes that a fund that contains only a minor investment component would not be eligible for the relief provided by the QPAM Exemption. This is true regardless of the Plan type. If a Plan has mixed-use purposes, the Plan sponsor should establish a separate account for any investments held directly by the Plan in order to rely upon the QPAM Exemption for that portion of the Plan's assets. Relatedly, a fund or other pool of Plan assets that contains no investment assets would not be able to rely upon the QPAM Exemption. However, as provided in Section I(c) of this Final Amendment, an Investment Fund that makes distributions and/or engages in other activities that are ancillary to the fund's primary investment purpose will not fail to be an Investment Fund established primarily for investment purposes. The Department provides this additional clarification in the Final Amendment because distributions and other ancillary services are generally necessary in order for investment funds to operate.

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